Many savers are missing opportunities that could leave tens of thousands of pounds on the table, often because commonly repeated claims about ISAs are wide of the mark.
From confusion around contribution limits to the belief that cash is always the safer option, these misunderstandings can quietly build into losses of more than £40,000 over a lifetime.
With the financial year drawing to a close, more than half of Britons say they feel anxious about investing their money, a mood that continues to shape how people use, or avoid, Individual Savings Accounts.
That unease is now prompting experts to confront persistent myths that may be leaving households significantly out of pocket.
Antonia Medlicott, Founder and Managing Director of Investing Insiders, has highlighted five misconceptions she believes are stopping savers from making the most of the tax shelter.
Opting for a traditional savings account instead of a Stocks and Shares ISA could mean ending up almost £42,000 worse off over twenty years.
Getting to grips with what is fact and what is fiction could therefore be vital for anyone serious about building wealth. One of the most harmful misunderstandings, Medlicott argues, is the idea that ISAs are simply too risky.
She advises: “Fear is the main reason that puts people off using an ISA, as there is a risk that your investments can drop based on the markets. However, if you invest for longer-term goals, you don’t need to be as concerned about a short-term loss, because the markets generally go on to recover over time.”
The numbers paint a compelling picture when comparing investment options over extended periods.
Stocks and Shares ISAs have delivered average returns of approximately 9.5 per cent annually over the past decade, substantially outperforming typical cash savings rates.
Someone starting with £5,000 and contributing £50 monthly would accumulate £69,058 after 20 years in a Stocks and Shares ISA, despite only depositing £17,000.
Fewer than a third of women direct their ISA contributions into Stocks and Shares accounts, at just 29 per cent | GETTY
The same approach in a savings account returning 3.5 per cent would yield just £27,452.
Another prevalent misconception is that keeping money in a savings account offers greater security than an ISA.
Ms Medlicott said: “Not enough people realise that if you have your money in a savings account with a low interest rate, or a current account that doesn’t pay any interest at all, then you are losing money.”
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When inflation exceeds the interest rate on savings, the real value of that money diminishes over time, leaving savers worse off despite apparent stability.
Many potential investors are also deterred by the belief that substantial capital is needed to open an ISA.
In reality, just £1 is sufficient to get started, regardless of the £20,000 annual allowance.
The same approach in a savings account returning 3.5 per cent would yield just £27,452
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GETTYMs Medlicott advises: “Don’t let the £20,000 allowance put you off, as this amount doesn’t have to be used. Even placing small amounts of money into an ISA will add up over time.”
The belief that transferring an ISA to a different provider is complicated also proves unfounded.
Ms Medlicott advises: “If you spot a better rate or lower fees, don’t be scared to make the move. Contact the provider you want to join to see how their process works, as this means you won’t lose your tax-free status.”
Cash ISA transfers typically complete within 15 working days, while other ISA types take up to 30 calendar days, though busy periods such as ISA season may extend these timeframes.
Crucially, savers must avoid withdrawing funds themselves and depositing them elsewhere.
Investors should remember that historical performance provides no guarantee of future returns
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GETTYMs Medlicott warns: “It’s important that you don’t withdraw funds from your ISA and put them into another account yourself, as it will be counted against your annual allowance, and the withdrawal will mean the money is liable for tax.”
Not all providers accept transfers, and exit fees may apply. The final myth Ms Medlicott addresses is the notion that ISAs offer a route to rapid financial gains.
She advises: “If you are looking for an easy way to make money, then ISAs are probably not the answer. They are not designed for short-term, quick-win saving. If anyone is trying to sell you a dream of being able to make easy money, then it is likely too good to be true.”
Investors should remember that historical performance provides no guarantee of future returns, and all investments carry the possibility of losing the original sum deposited.
Before committing funds to a Stocks and Shares ISA, Ms Medlicott recommends establishing an emergency fund first.
She advises: “Before putting money into an investment ISA, make sure that you have an emergency fund which means you have quick access to cash should you need it.”