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Guide to ISAs

 

You might be thinking “Should I be investing in the stock market?” and “Is it better to save money with a bank or hide it under the bed?” with different savings options nowadays you may be feeling a little overwhelmed, but don’t worry as our guide to ISAs will help make things clearer.

 

There are many savings options available these days; whether you want so save for a rainy day, your first home or your child’s future, there is an ISA to suit your needs. Take a look below for more information on the different types of ISAs.

 

What is an ISA?

ISA, short for Individual Savings Account, allows you to save and invest your money with a tax-free allowance of up to £20,000 each year, unlike a standard savings account with your bank.

There are six different types of ISAs, Adult ISAs include; Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, Help to Buy ISAs and Innovative Finance ISAs, and Junior ISAs which are ISAs for children.

 

How much can I save?

Adult ISAs have a maximum contribution limit of £20,000 each tax year; this means you can have a Cash ISA, a Stocks and Shares ISA, a Lifetime ISA, an Innovative Finance ISA, or a combination of them all. If you do have more than one ISA, your overall contribution limit of £20,000 is split between these ISAs, for example you can pay £10,000 into a Cash ISA, £6,000 into a Stocks and Shares ISA and £4,000 into a Lifetime ISA each tax year.

 

Although, if you would like to open a Help to Buy ISA, you can’t also open a Cash ISA in the same tax year. Lifetime ISAs and Help to Buy ISAs are the only Adult ISAs that have their own maximum contribution limit.

 

 

Cash ISAs

A Cash ISA is similar to an ordinary savings account, except you don’t pay tax on the interest you earn. Cash ISAs allow you to save up to £20,000 each tax year and are good for short-term savings, as long as you keep an eye on interest and inflation. Although, you should keep in mind that the Personal Savings Allowance means that basic-rate tax payers can gain £1,000 tax-free interest each year, meaning this may be a better option for you.

When you save in cash, the bank will lend your money to businesses that need it. The bank will charge interest on these loans, so when the businesses pay the interest back to the bank, you benefit from this too.

A Cash ISA may be suitable for you if:

  • you are a UK resident for tax purposes
  • you are aged 16 or over (Junior ISAs are available for under 16 year olds).
  • you want to earn tax-free interest on your cash savings

You can generally withdraw money from your ISA at any time, however this does not restart your contribution limit for the year. Please be aware some providers may charge for withdrawing money from your plan.

Click here for more information on Cash ISAs.

 

Stocks and Shares ISAs

A Stocks and Shares ISA also lets you save tax-efficiently and by investing in stocks and shares there is potential for growth. This ISA allows you to invest your savings in funds, shares and bonds, investing up to £20,000 each tax year. It is recommended to invest in a Stocks and Shares ISA for at least 5 years, as the longer you invest the greater the opportunity your money has to grow, and outperform the growth from interest on a Cash ISA.

‘Shares’ are when a business sells part of their company to others, when you buy a ‘share’ you buy part of this company. If the company does well then you can share the profit, however if the company isn’t doing well and doesn’t make a profit you risk losing some of your money. These ‘shares’ are commonly brought from the stock market.

When investing in stocks and shares, you can invest in funds made up of a mixture of assets. An asset is just something that has monetary value. Assets are divided into 5 categories, Stocks or Equities (also known as shares), Bonds (a loan to a business or government), Commodities (raw materials like coffee), Property (real estate), and Cash. These different assets will have different levels of risk and some mixed asset allocated funds include cash for a risk-controlled investment approach.

A Stocks and Shares ISA may be suitable for you if:

You can withdraw the money from your ISA at any time, however this does not restart your contribution limit for the year and it is recommended for you to hold a Stocks and Shares ISA for at least 5 years. Please be aware some providers may charge for withdrawing money from your plan.

Check out our ISA - it combines a Stocks and Shares and a Lifetime element so that you can have two ISAs in one place.

 

Lifetime ISAs

A Lifetime ISA is a savings initiate introduced by the Government in 2017, designed to help save towards your first home or for later on in life. You can choose whether you would like your Lifetime ISA to be held in Cash or Stocks and Shares, although you can only have one Lifetime ISA each tax year, regardless of whether it is invested in stocks and shares or cash.

You are able to save up to £4,000 each tax year into your Lifetime ISA. This £4,000 counts towards your overall ISA limit of £20,000 for the tax year.

The Lifetime ISA benefits from an additional 25% bonus paid by the Government; that’s £1 for every £4 you contribute, which means that if you start saving from age 18 and continue contributing the maximum amount up to age 50, a further £33,000 would be added from the Government.

A Lifetime ISA may be suitable for you if:

  • you are a UK resident for tax purposes
  • you are aged between 18 and 39
  • you are looking to purchase your first home, up to £450,000 in the UK with a loan
  • you are looking to save for later on in life (after age 60).

You can transfer your Lifetime ISA to another provider if you wish, however if you want to transfer your Lifetime ISA into a different type of ISA or withdraw this money for any reason other than a deposit on your first home, or before age 60, then a Government charge of 25% will be applied to the amount of the withdrawal.

The Government charge effectively reclaims the original Government bonus, plus any growth from the bonus money, and also applies a penalty. So you may get back less than you have paid in if this charge applies to a withdrawal.

If you save into the Lifetime element for later on in life, instead of enrolling in, or contributing to a qualifying scheme, workplace pension or personal pension scheme you could lose the benefit of contributions by an employer to that scheme. Unlike a qualifying pension scheme, workplace pension or personal pension scheme the value of a Lifetime ISA, including the Government bonus, could impact current and future entitlement to means tested benefits, which are affected if the value is over £6,000.

Check out our ISA - it combines a Lifetime and a Stocks and Shares element so that you can have two ISAs in one place.

 

Help to Buy ISAs

A Help to Buy ISA is an ISA designed for first time buyers to save towards their first house (under the value of £250,000/ £450,000 in London), this is only provided as a Cash ISA meaning only some providers allow you to save in a Help to Buy ISA and a Cash ISA in the same tax year.

You can contribute up to £1,200 in the first month of opening your Help to Buy ISA, after that you can save up to £200 a month, which is a maximum of £3,400 each tax year. Once you use these savings for your first home the Government will add a 25% bonus, but only a maximum of £3,000.

A Help to Buy ISA may be suitable for you if:

  • you are a UK resident for tax purposes
  • you are over the age of 16
  • you are a first time buyer

You can withdraw the money in your Help to Buy ISA at any time, however bear in mind you can only save £200 each month. So, for example, if you deposit £200 and then withdraw £50 in the same month, you will have to wait until the next calendar month to make another deposit.

Click here for more information on Help to Buy ISAs.

 

Innovative Finance ISAs

Innovative Finance ISAs allow you to lend money through peer to peer lending, or invest in companies through crowd funding, allowing you to invest up to £20,000 each tax year.

This works by lending your money to borrowers in return for a projected amount of interest based on the length of time the money is untouched for, although there is a scope for greater returns the risk to capital is generally higher.

An Innovative Finance ISA may be suitable for you if:

  • you are a UK resident for tax purposes
  • you are over the age of 18
  • you would like to choose the types of borrowers to lend to and set what level of return you would like

Please note that Innovative Finance ISAs are not protected by the Financial Services Compensation Scheme. In the event of borrower default or platform failure, lenders capital is entirely at risk.

Click here for more information about Innovative finance ISAs.

 

Junior ISAs

Junior ISAs are a saving account for parents to save on behalf of their child. The money invested can be held in cash and/or stocks and shares, meaning you can split your child’s savings if you wish. These savings are tax-free and remain locked away until the child’s 18th birthday. If the child chooses not to access the money then the Junior ISA will automatically convert into an adult ISA.

Parents can save up to £4,368 this tax year (2019/20); this doesn’t count toward the adults ISA savings limit. Family and friends can contribute too, which can make the perfect gifts for birthdays and special occasions.

A Junior ISA may be suitable for you if:

  • you are a UK resident for tax purposes
  • you have a child under the age of 18
  • you would like to save for your child’s future
  • you would like family and friends to gift to their future

If you have a child born between 1st September 2002 and 2nd January 2011 you child will already have a Child Trust Fund. For more information on Child Trust Funds see our hub

Check out our Junior ISA and start saving from as little as £10 a month.

Save for your child's future Find out more about a Junior ISA