Investing Fundamentals

Hacking Money the British Way With an ISA

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Hack Money The British Way

In America we get quite a lot of lip service on our financial tools and hacks but I think the Brits need some love as well.  Interestingly, some of the best financial strategies and incentives exist in the UK and not in the US.

Maybe it’s because the UK is a bit more progressive on many social issues as compared to the US or maybe the British have a much stronger saving for the future mindset.  Either way, we’re going to dig into how the British hack their savings with ISAs and why you would be crazy to not make use of this excellent financial vehicle.

What is an ISA?

Simply put the ISA is a British version of the IRA.  Or the IRA is an American version of the ISA.  Either way, they are very similar financial instruments but in a battle royale the ISA would most definitely come out the victor.

The ISA or Individual Savings Account carries a deceptively simple name as it is so much more than what comes to mind when you hear the term Savings Account.  The IRA or Individual Retirement Account however is better named as it more closely describes the goal of the account.

With an ISA or IRA you contribute post-tax money much like a normal savings account, however all of your future earnings on that money are tax free.  The savings on taxes alone is far and away a solid reason to contribute to an ISA, but it gets better.  Unlike the American IRA, the British ISA has no restrictions on when or how much money can be withdrawn.  No need to wait for retirement with an ISA. Generate your gains tax free and then withdraw whenever you like without a penalty.

Now that’s what I’m talking about!  There are no such free money growth opportunities in the US unless you count withdrawing your hard retirement savings at the ripe old age of 65.  I plan to retire well before then so IRAs aren’t much help to me.  ISAs on the other hand, are an early retiree’s best friend.

The Cash ISA for the Risk Adverse

On this blog we talk a lot about leveraging the stock market to fuel savings growth but we rarely talk about the alternative – the savings account.  Why do we  ignore savings accounts? Because generally speaking the interest rate is insultingly low.  The good news for the ISA is that it blows it’s American counterpart out of the water.

In the US you would be lucky to find a bank that pays you as high as 0.85% interest.  No the decimal isn’t in the wrong place, the interest rate really is that low.  I call that interest level the “I want to be taken advantage of” rate because you’re not earning jack but the bank couldn’t be happier.

The Cash ISA on the other hand, can earn you quite a lot more.  If you choose the best ISA in the UK from what I’ve seen, you can earn as much as 2.35% interest!  In case you’re not excited, that’s well over three times the US savings rate average plus you don’t pay any taxes on your gains.  If you’ve got a fair amount of cash and you’re very close to retirement and don’t want to take on much risk, the cash ISA is for you.

In the UK you usually get taxed at least 20% on your savings interest before you ever get to touch it.  Therefore, in effect your savings will feel like a lot more like 2.8% and if you’re in the middle class paying closer to 37% of your earnings in taxes, it’s going to feel more like 3.2% interest.  These days that’s nothing to sneeze at.

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The Lucky ISA Addition

Now, I think the ISA is a pretty solid tool to build wealth but the British still were not satisfied.  Not only did they want their savings accounts to be superior to the US options but they came up with yet another perk to make the ISA even more awesome.  What is this perk?  To encourage their clients to save, many banks also run a Savings Lottery.  What does that even mean?!?

A Savings Lottery is just a lottery run by your bank (sorry, only UK banks) where you may, out of the blue, win up to £250,000 in a monthly drawing.  That’s just a grand prize on the over £1,500,000 pounds given out each month for various prize tiers by each major bank.  When I discovered this I was speechless.  Not only is that a great perk for savers but it’s an awesome incentive to attract new savers, especially the lower middle class who usually wind up wasting money on lottery tickets.

How does it work?  Just keep at least £5,000 in your ISA each month and you’ll be automatically registered to win.  I wish US banks were allowed to offer this!

Did You Open An ISA Yet?

Sadly, you can’t open an ISA if you aren’t from the UK but if you are, what are you waiting for?  Even if the Cash ISA isn’t for you and you would prefer to invest in stocks and bonds, you can still do that with a Stocks and Shares ISA account.  The only reason I can think of for you to not contribute is that you have no money because you’re not budgeting!

Go out there and maximize your savings, open your decidedly British ISA!

Do you have any experience with ISAs?  Have a better idea for where the Brits should stash their retirement savings?  Share it with the community in the comments!

Andrew Fiebert - Chief Nerd
Andrew Fiebert is a thirty-something soon-to-be father of twins, a self-professed data nerd, and has worked as a Data Engineer for Barclays Capital and iHeartRadio. He's spent the past six years growing LMM into a multi-six-figure business with over 500 hours of free personal finance education that reaches over 1 million people every month. Andrew has a B.S. in Computer Science and has been featured in Quartz, Forbes, Business Insider, and The Telegraph.

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