An overview of ISAs available to you
If you have ever considered investing in something other than cash you have probably looked at opening an Individual Savings Account, more commonly known as an ISA.
The ISA has been around for more than 20 years and there is a wide range of ISAs to choose from.
The following article will explain the key differences and how each type of ISA can be of benefit in meeting your financial goals.
What is an ISA?
An Individual Savings Account (ISA) is a special type of tax efficient account. There are different types of ISAs and the annual allowance is currently £20,000 for the 2023/24 tax year.
You are not allowed to put money into more than one of the same type of ISA in the same tax year and the allowance cannot be carried forward to the next tax year so it is important to use as much of it as you can each year.
Let us remind ourselves about the different types of ISAs that are available to you.
What are cash ISAs
Cash ISAs are available to anyone over the age of 16 and are similar to a standard bank or building society account. The key difference with a cash ISA is that any interest earned within the ISA is always tax-free.
A fixed rate cash ISA will offer a fixed rate of interest for a specified term. You will be able to access your money before the end of the chosen term but you may suffer a hefty penalty to do so.
Alternatively, another option could be a variable rate cash ISA or an easy access cash ISA. These tend to offer you unrestricted access if you need to get hold of your money quickly.
A regular savings cash ISA allows you to save a small amount of money each month and is good for getting you into the savings habit by agreeing to pay in a minimum amount on a regular basis.
You will need to decide how long you are prepared to put your money away for, the type of contributions you would like to make and whether you will need quick access to your money.
It is important to review all the available options (and hidden penalties) so that you select the best cash ISA to suit your needs.
Since the introduction of the Personal Savings Allowance (PSA) in 2016, which means that basic rate taxpayers can earn £1,000 of interest per year and higher rate tax payers £500 per year before having to pay any tax, many people have asked whether it is still beneficial to have a cash ISA as many people rarely exceed their PSA on interest in an account outside an ISA.
However, for those who do not qualify for the PSA and for those who are very close to exceeding the PSA that is applicable to them, the flexibility to access the best rates and the tax-free growth year on year within the ISA certainly still makes it an attractive proposition for savers.
How does a stocks and shares ISA work?
A stocks and shares ISA allows you to invest your money across a variety of markets and sectors, offering wider investment opportunities and potential for growth when compared to a cash ISA. It comes with a greater degree of risk and your investments may go down as well as up in value. All income and growth within a stocks and shares ISA is tax-free.
The charges made by your chosen provider and the investment decisions you make can have a significant bearing on how your ISA performs.
Unless you are an experienced investor who is comfortable with the ups and downs of stock market investing it is best to seek guidance from a reputable financial adviser.
What is a lifetime ISA?
A Lifetime ISA or LISA is open to individual’s aged between 18-40. It’s aimed to help younger savers accumulate a deposit for their first home or for people looking to save for later life.
You can contribute to it up until your 50th birthday and you can opt to save into stocks and shares, cash or a mixture of both. The annual LISA limit is £4,000 and the government will add a 25% bonus to the amount you save. The bonus will be added to your LISA the month after the deposit.
If you do not use your LISA for a home deposit, you can access the funds penalty-free from your 60th birthday. The LISA can be used to purchase a home up to £450,000.
You are still able to access your LISA funds before you turn 60, but unless it is for a first house deposit you will pay a 25% withdrawal penalty, in effect losing the government bonus and some more, so you must be content to lock your money away for a significant length of time.
The LISA was put in place to replace the Help to Buy Scheme. Both the LISA and the H2B ISA offer the 25% government bonus and the chance to accumulate a deposit for your first home. The H2B ISA is no longer available for new subscriptions.
However, the bonuses are added in a different way and you can only use the 25% bonus from one of these vehicles to buy your first home.
Junior ISAs or JISAs were introduced in November 2011, replacing the Child Trust Fund.
How does a Junior ISA work?
A Junior ISA can be opened at birth and is controlled by a parent or guardian until the child turns 16. You can invest the annual allowance into stocks and shares, cash or a mixture of both. You can make payments to a cash JISA and a stocks/shares JISA per tax year (but can only hold one of each type). Once your child turns 16 they can also pay £20k to a cash ISA. The current annual allowance is £9,000.
This can be a concern for parents who may not be comfortable with their child having full control over a large sum of money at such a young age, especially as the parent will have no say as to how the money is held or spent.
However, JISAs are fantastic for building up savings from birth and if you choose to include your child in the process it will give them the opportunity to engage in financial planning from an early age.
NB: Any child holding a Child Trust Fund (CTF) can’t have a JISA opened for them unless the CTF is first transferred to a JISA and the CTF closed.
What is an innovative finance ISA?
An Innovative Finance ISA or IFISA is designed to enable those who are interested in peer-to-peer lending to do so via an ISA wrapper. Any interest payments and capital gains can grow tax-free.
These are complex products with significant risks attached and will not be appropriate for everyone. Please contact us if you wish to find out more.
The ISA has evolved over the years and its variations allow for some fantastic planning opportunities to help you achieve your financial goals.
Getting the balance right can be complex and time consuming so it is important to discuss your options with a trusted adviser.
Your ISA investment can go up and down and you may not get back the full amount invested.
Our website has more content on specific types of ISA and it would be great to hear from you if you wanted to talk through your options with an Adviser.