Everyone should have an ISA. An ISA is simply an ‘individual savings account’ that pays you interest that is tax-free. The only restriction is that there is a maximum you are allowed to invest in any one tax year, which currently stands at £20,000.
ISAs come in several different types, and today we’ll guide you through what is available and what are the pros and cons of each so that you can make an informed choice of how to invest your hard-earned cash.
What are the different sorts of ISAs?
Altogether, there are seven main types of ISAs, two of which are only for the under 18s, but all are tax-free. Which you choose depends on your situation and, to some extent, what you are saving for.
Cash ISAs operate just like a normal savings account except that there is a limit on how much you can deposit in any one tax year, and no tax is liable on the interest that accrues. For the tax year, 2020-2021 the government-set limit is £20,000, and anyone over 16 years old may open a cash ISA account. You may only open one such account in each tax year.
There are three main variants of cash ISAs:
- Instant-access cash ISA: This flexible account allows you to deposit and withdraw as and when you like and has variable interest rates.
- Regular savings cash ISA: You save a minimum monthly deposit up to a maximum of £1,666 and receive a fixed interest rate.
- Fixed-term cash ISAs: In return for leaving your money locked away for a fixed period, the interest you receive is generally better than an instant-access ISA, and the longer the term, the higher it is.
Depending on the provider, there are variations available, depending on the provider such as triple access ISAs where you can withdraw money three times in a 12-month term, and inheritance ISAs for those who inherit an ISA from a spouse or partner.
Stocks and shares ISA
Once again, you must be over 18, and the maximum you can invest is £20,000, but this time you are buying stocks and shares with your savings instead of simply accruing interest from the institution that runs the ISA.
You can choose a managed account, so someone will allocate and purchase your stocks and shares for you, or one where you decide where to invest your money. In either case, the provider usually charges a fee. All capital gains and income are tax exempt.
There is the opportunity to make more from a stocks and shares ISA than a cash ISA but always remember investments can go down as well as up and there is the chance you may lose money rather than gain it, depending on the risks you take.
Innovative finance ISA
The same conditions pertain to this style of ISA, you have to be over 18 and the maximum investment, as of now, is £20,000 in a year.
An IFISA is involved with peer-to-peer loans. This form of investment has become popular in recent years. It offers the investor the chance for a greater return and provides the borrower with finance that he or she might not otherwise be able to obtain from traditional sources. On the whole, the higher the interest, the greater the risk. As with a stocks and shares ISA, there is the possibility of losing money, so tread carefully.
Introduced in April 2017, Lifetime ISAs are a way to save for a first home or your retirement. You have the option of either a cash ISA or a stocks and shares ISA. You have to be between 18-39, and if you are going to buy a home, you must be a first-time buyer.
You can save a maximum of £4,000 each year, which forms part of your £20,000 ISA allowance. The government will add 25% to your savings, and this is paid into your account every month. If you are saving for your retirement, you can continue topping up this account until you reach the age of 50. In that case, you cannot withdraw the money until you are 60.
The Help to Buy ISA was a government-backed scheme designed to aid first-time home buyers. The idea was that the xprospective home buyer would save regularly, up to £3,400 in the first year and £2,400 in subsequent years. Like the Lifetime ISA, the government would add 25% to your savings for a house purchase, to a maximum of £3,000. This sum was paid directly to the conveyancer or solicitor on completion.
This project was shelved at the end of November 2019, so you can’t currently open a new help-to-buy ISA, but those who opened one can continue to gain from it.
A Junior ISA encourages those under 18 years of age to save. The yearly limit rose to £9,000 for 2020-2021, and parents, grandparents and friends can contribute. This amount doesn’t come out of the adult’s allowance as the money belongs to the child. The parent or guardian manages the account.
No withdrawals are allowed until the child reaches 18, though they can take control of the account two years before that.
The benefits of an ISA
The benefits of having tax-free savings are clear – you can save a significant amount of money without worrying about being taxed for the pleasure. Although you are limited to £20,000 in a tax year, this allowance refreshes every April.
You can have more than one ISA, but you can only pay into one cash ISA, one stocks and shares ISA and one innovative finance ISA in each tax year (with a combined limit of £20,000).
You can move an ISA to another provider if they offer a better interest rate, but you must use the correct procedure, or it could lose its ISA status. Consolidation can likewise be a sensible move as you can take advantage of better offers either with the same provider or another.
Why are ISAs not more popular?
In 2016 the government brought in the personal savings allowance, which means that all savings are, to some extent, tax-free. As long as the interest you earn stays below £1,000 if you pay the basic (20%) rate of income tax, or £500 if you are a higher-rate taxpayer, it is not liable to taxation. The personal savings allowance doesn’t apply if you earn over £150,000 per annum.
With current low-interest rates, you need to be saving a significant amount to worry about paying tax. But for those who are fortunate enough to have large savings pots or are additional-rate taxpayers, then ISAs make perfect sense. ISAs would protect your savings from tax even if your salary were to rise and consequently for your personal savings allowance reduce.
Investing in an ISA is a sensible way to save, but as you can see, there is a lot to consider. Should you have just a cash ISA, or be more adventurous, perhaps, and have a stocks and shares ISA or even an IFISA?
If you’re not sure how to use ISAs to your best advantage, Evason Fildes is here to help. With years of experience in financial advice and a large team of experts, we are in the perfect position to guide you through the ISA options. You can apply for a free review online today.