UK Individual Savings Accounts (ISA) Explained For Expats
The financial implications for moving to the UK are vast and often complicated. Once you’ve navigated visas, healthcare surcharges, foreign exchange transfers as well as packing your life into a few suitcases eventually you’ll settle in, start working and begin saving again.
This guide explains what the ISA is, why should be investing through this tax-vehicle. I’ve catered my advice towards Expats living in the UK however the advice here is just as valid for UK domiciled individuals – I’ve just added extra details relevant for expats as this is an under published topic.
ISA = Individual Savings Account.
Tax Details of an ISA
The annual allowance for an ISA is £20,000 for each financial year. The UK financial year 2021 ends on April 5th, 2021.
To be eligible you simply need to be a UK tax-resident, or a servant of the Crown.
All returns made in your ISA are tax-free. You are not liable for tax on interest income, any dividends or any capital gains.
You can take the funds out whenever you want. However, note the allowance is on a gross basis not net. For a given financial year, if you deposit £20K, withdraw £5K for a few months you can’t put that £5K back in.
You can open only one of each type of ISA account per year.
You need to be over 18 for most type of ISA accounts - if you are over 16 you can open Cash ISAs.
The greatest advantage of the ISA is flexibility.
By making your contributions into the ISA you are guaranteeing yourself optionality; you might need the money for a house purchase, an out of hand Vegas weekend or if you don’t need the liquidity you can let the money nest away.
Expat Perspective
For expatriates who are living overseas in the UK and considering contributing to a superannuation / pension-type scheme, I’d generally suggest you consider the ISA.
By living overseas, you (very likely) can’t claim the salary sacrifice tax-benefit, so you are essentially locking up money for decades. If you move back to your domicile (“home”) country you can always consider taking your ISA pot of money and then putting it into your superannuation / pension vehicle.
You are likely to be liable for taxes on these investments if you are an expatriate and return home and resume your tax-residency in your country of domicile. I will let you research this for your specific country rather than try to generalise across jurisdictions.
Is it worthwhile for an Expat?
Under the assumption you are going to pay some kinds of taxes once you leave the UK and say return back to the sunny shores of Australia, you might ask what the point is of bothering with an ISA.
Many ISA accounts are free so there is no cost to you.
You have the benefit of hassle free-tax reporting on your investments. This is a great time-saver, particularly valuable if you trade frequently or hate paperwork.
Optionality. As an Expat you are planning on coming home, but plans change, you might meet the love of your life in the UK and settle down happily here. The key with the ISA is you have optionality; no-tax while you are in your Expat-phase of life.
The £20,000 allowance gives you a reminder to save and an incentive to do so.
Now let’s move onto what you can invest in with your ISA.
Types of ISA
Cash ISA
Innovative Finance ISA
Lifetime ISA
Shares / Stocks ISA
Cash ISA: Not Worthwhile
Prospective returns on cash ISAs are anaemic (if you get more than 0.50% per annum you are doing well)
The time taken to set one up is probably not worth the tax-savings. You’d be better cooking for yourself versus ordering take-out and you’ll probably save more money.
If you have so much cash you would be paying income-tax on the interest (meaning you earn over £150,000 or collect more than £1,000 per year in interest [implying a ~£200,000 cash balance], you should probably be investing in more risk-seeking assets
Innovative Finance ISAs
Innovative Finance ISAs are essentially an ISA account where you invest in peer-to-peer lending (P2P). P2P lending is an opaque form of fixed income investing which the UK is one of the global leaders in.
The P2P market operates across the entire credit spectrum, from consumer finance to property development finance to commercial operating business loans. I don’t like P2P because of the structure of the platforms.
They either let you have detailed access to information where you select individual loans you want to fund, or you invest in a broad portfolio. In the case of the latter, you are rarely given significant information to make an informed decision. They boast healthy “set aside” provisions to offset losses from defaults but I just can’t get comfortable investing in this space.
Lifetime ISA
Lifetime ISAs allow you to save up to £4,000 per annum, with the government topping up your contribution by 25% (£1,000 limit). They are available for those 18 to 39 and funds can be used to buy your first property or save for retirement.
They are great for UK domiciled individuals. They are not worthwhile for an expatriate.
As an expatriate you need to focus on the mobility of your money. Thus, property purchase in a country you are not planning on domiciling longer-term is not a sound strategy.
The remaining option is saving for your retirement. Given you won’t likely be around for this, if you want to redeem your funds, you’ll pay a 20% charge for early withdrawal. This means the initial 25% is offset, plus any gains you’ve made will be handed back to HMRC.
The Only Logical Option: Shares
Share ISA accounts let you invest in publicly traded shares of companies like Apple, Amazon and Tesla. You can also invest in exchange-traded funds; these are broad portfolios of companies that let you easily diversify your portfolio with one trade.
In a nutshell, let’s assume you are a typical Expat, somewhere between 25 and 40. You are relatively early in your career, your income each year is broadly higher than last year. You are going to retire at some point in your 60s. Under such a backdrop, if these are savings you aren’t reliant on (food; intended house purchase) then you have a good 20 plus years to invest. From a financial planning perspective, you have a strong ability to absorb risk.
You might not have a willingness to absorb risk, but over 20 years you will have enough time to let the compounding wonder of capitalism embodied via public equities work it’s magic. Shares are the asset class within an ISA that is mostly likely to deliver you a real return.
If you are complete beginner, here are some ETFs to get you started:
- S&P500 ETF (LSE: VUSA)
- FTSE100 ETF (LSE: ISF)
- NASDAQ-100 (LSE: CNDX)
- MSCI ACWI ETF (LSE: SSAC) – if you only buy one, make it this one.
The MSCI ACWI ETF tracks the performance of over 2,000 shares across the entire world. If you want broad equity exposure this is the simplest, most cost effective way to do it.
ISA Account Providers
There are two ISA accounts I recommend; I have accounts with both of these providers.
For the experienced investor I’d use Trading 212, which is a full-online stockbroking platform. You’ll be able to buy individual shares as you see fit, or some of the ETFs mentioned above. Here’s a new user promo code for a free share worth up to £100.
For the beginner investor I’d use Wealthify. They create portfolios based on your risk characteristics and auto-allocate for you. Here’s a new user promo code for a £25 bonus.
Re: Wealthify I believe their risk questionnaire while well-intended is not structured appropriately and so your answers will influence the portfolio you are allocated. So if you want a more aggressive portfolio (mostly shares), ensure you select the most risk-seeking options. Once you go through the motions you’ll see what I mean.
The best time to plant a tree was twenty years ago, the next best time is now.