ISAs (Individual Savings Accounts) carry risks that vary by type, primarily involving potential loss of capital for Stocks & Shares ISAs and purchasing power erosion due to inflation for Cash ISAs. Major risks include market volatility, locking away money, penalties for early withdrawal, and potential tax rule changes.
You could enjoy higher returns with a stock and shares ISA than with a savings account, but you could also lose money if your investments fall in value.
No, cash ISAs do not always pay the best interest rates, so it's worth shopping around. Historically, to beat an ISA you would need to find a net interest rate on a savings account that was higher than an ISA's gross interest rate. Net interest represents the rate you get on your savings after tax has been deducted.
Stocks & Shares ISAs are only available online through NatWest Invest. The value of investments can fall as well as rise, and you may not get back the full amount you invest.
The main benefit of saving with an ISA is that you don't have to pay tax on any interest you earn. Another key benefit is their flexibility. You can open and fund more than one of the same kind of ISA in the same tax year with different providers, but only one with us per tax year.
Pensions are particularly beneficial for higher-rate taxpayers who get a higher rate of tax relief on initial contributions. ISAs are much simpler and more flexible, but you are held back by the lower annual investment limit. In practice, a combination of ISAs and pensions will be suitable for most people.
Investments that pay interest (like government and corporate bonds), or rental income (like some property funds) provide 100% tax-free income if held within an ISA. Everyone gets a £500 tax-free Dividend Allowance. This is on top of your personal allowance – the amount you can earn each tax year before paying tax.
Disadvantages: Interest rates may decrease, funds might be locked in fixed-rate ISAs, and not all accounts permit transfers, sometimes incurring exit fees.
Cash ISAs are tax-free. You won't pay tax on any interest you earn. At NatWest, we offer an instant access Cash ISA, and a Fixed Rate ISA with a set term. On the other hand, the interest you make on normal savings accounts may be taxed, if it's more than your Personal Savings Allowance.
All interest, income and capital gains within an ISA are tax-free, and you don't need to include them on a tax return. Learn more about the different types of ISAs in our guide to ISAs and other tax-efficient ways to save or invest.
The 20k limit only applies to deposits within any one financial year. If you exceed that limit, at their discretion HMRC can require that the money be returned, impose tax on the interest it earned, or fine you.
Putting money into an ISA
Every tax year you can save up to £20,000 in one account or split the allowance across multiple accounts. The tax year runs from 6 April to 5 April.
If you move abroad, your ISA can remain open, but new subscriptions are generally not allowed.
Fractional shares held in ISAs tax-free
This is called a fractional share. In November 2024 a new rule declared that any 'fractional shares' you have already bought or buy in the future under the ISA wrapper will be tax free. Find out more about Stocks and shares ISAs in our guide.
On average for a comfortable retirement, an individual will spend £43,100 a year, whilst the average couple in retirement spends £59,000 a year. This means if you retire at 55 with £300k, an individual will run out of funds in approximately 7 years, and a couple in 5 years.
Because of the way in which interest rates can fall, as well as rise, there is a risk that savings held in a cash ISA may struggle to keep pace with inflation. In other words, even though your cash balance is steadily increasing, your money may be worth less in real terms as things become more expensive to buy.
The 4% rule is a retirement guideline suggesting you can withdraw 4% of your initial retirement savings in the first year, then adjust that dollar amount for inflation annually, with a high chance your money lasts 30 years. Developed by William Bengen, it assumes a balanced 50/50 stock/bond portfolio but doesn't account for taxes or fees and may need adjustments for longer retirements, higher costs, or different investment mixes, with some experts suggesting lower rates (like 3.9%) or dynamic strategies (like guardrails) for modern retirees.