As index tracker charges are usually the same whether they are in an ISA or not, and as being tucked into an ISA means any gains made are tax-free, the conventional wisdom is to put your index tracker in an ISA. Doing this ensures your tracker-related gains will be protected from Capital Gains Tax.
How an ISA protects you from Capital Gains Tax
If you are investing for the long term, it is possible that any gains your index tracker makes will not be covered by the annual exemption limit. By tucking your index tracker, and any income and dividends it yields, into an ISA, you can protect yourself from the brunt of Capital Gains Tax. There is an additional benefit for higher rate taxpayers, as they won’t be required to pay additional tax on any dividends, should that investment be wrapped in an ISA.
But there are some circumstances when putting your index tracker in an ISA isn’t necessarily the best thing you can do. Here they are…
Possible reason one: you’re saving for retirement
If you are saving for your retirement, you may be better off tucking your savings into a stakeholder pension than you would option for the traditional tracker-in-an-ISA option. Although stakeholder pensions aren’t perfect -- no investment vehicle is! -- they are very well suited to the purpose: they are designed expressly to provide you with a safe and reliable retirement income. Whichever route you choose, we suggest you research your options before making a decision, as there is something to be said for both.
Possible reason two:
Some index trackers cost more to buy when they are in an ISA than they do when they are not. This is sometimes the case with trackers set up as investment trusts, or with exchange traded funds.
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