ISAs: Which ones should you have?

Currently there are four different adult ISAs (Individual Savings Accounts) which you can open and use today; cash, Stocks and Shares, innovative finance, and lifetime. Across all of these you can only save a maximum of £20,000 per tax year (Mar-Apr). You can also get a Junior ISA for children which has a maximum saving amount of £9,000.

What is an ISA?

An ISA is a tax efficient way to save or invest money. You do not have to pay tax on interest, dividends or capital gains on any investments or savings held within an ISA account. This is extremely beneficial if you earn more than the individual savings related tax free allowances meaning your savings and investments can work harder.

Every year you can put money into one of each kind of ISA up to a maximum of £20,000 across all of the different ISAs you have. For example, you could contribute £15,000 into a stocks and shares ISA, £4,000 into a Lifetime ISA, and £1,000 into a cash ISA all in the same tax year.

Opening an ISA account is as simple as opening a normal bank account and my different institutions offer them. For example, I have a cash ISA with a bank, a stocks and shares ISA with Trading 212 and a Lifetime ISA with a financial app.

Cash ISA

The cash ISA is the simplest form of ISA available to you. Typically the main two places you will open this account is with your bank or with the National Savings & Investments (NS&I). You need to be 16 years old or over and resident in the UK. You can only deposit your cash savings which will gain interest at the established rate, which at the moment is very low.

Since the financial crisis of 2008/9 the savings interest rates have been very low. While ISA do typically offer a better rate, it is still very low. The best annual rate I have been able to find is 1.3% if you are willing to lock away your money for 5 years. But for instant access the range will be between 0.05% to 1.11%.

Personally I would only use a cash ISA for either short term large savings or for an emergency fund. They don’t offer a high enough return for anything long term.

Stocks and Shares ISA

This is my favorite form of ISA. This account allows you to do exactly what it says on the tin, invest in stocks and shares. The benefit of this account is that you will not have to pay any tax on capital gains or dividends from any investments made. However, you do still have to pay a tax (or duty) on any UK based stocks and shares at a rate of 0.5%. A bit of a pain, but you can’t avoid it unless you only buy stocks and shares from other countries e.g. USA, Germany, Canada etc.

I personally use a stocks and shares ISA to invest through the Trading 212 app. The rate of return you receive on your savings will be determined by how well your investment do. Many financial institutions and brokerages offer ISA accounts where you can invest in individual stocks and bonds or funds. If you are from the US it is probably equivalent to Roth IRA. You do need to be at least 18 years old to open an account and you will probably need to provide ID or you national insurance number.

If you are saving long term this is the account I would probably go for. But always make sure you research your investments as the value of your saving could go down as well as up!

Innovative Finance ISA

The innovative finance ISA allows you to to use your tax free ISA allowence while investing in peer to peer lending. If you don’t know, peer to peer lending is a form of investing where you directly lend directly to people or business through a platform such as RateSetter. The borrowers then repay the money with interest which you receive.

The main risk is that borrowers that you are lending to could default on their repayments. But most platforms that offer peer to peer lending have a fund set up to protect your money against default. However, it is a risk that should a large numbers of people default on loans even the fund might not cover the loses. Additionally, it is worth mentioning that innovative finance ISAs are not covered by the Financial Services Compensation Scheme (FSCS).

I do not personally have an innovative finance ISA but I do invest in peer to peer lending through RateSetter. You do typically get higher interest rates than bank accounts, usually in the region of 3-5%. But as with anything do your research and don’t put all your money in one investment.

Lifetime ISA

The Lifetime ISA or LISA is a relatively new form of ISA that was introduced as a replacement to the Help to Buy ISA scheme. It is intended for use of either buying your first home or for saving towards retirement. While with all the other ISAs above you can put in as much money as you like up to a maximum of the ISA limit, you can only put a maximum of £4,000 into a LISA.

LISAs can come in two forms, cash or stocks and shares. With the cash version you will get a standard interest rate whereas you will get an investment rate of return with the stocks and shares type. But with either you will get a 25% bonus of up to £1,000 on deposits every year. To open a LISA you need to be at least 18 year old but under 40.

If you want to use your LISA towards buying your first home there are a few conditions:

  • The property must be valued at £450,000 or less
  • You must have had the account open for at least 12 months
  • Use a solicitor or conveyancer to buy the property – the LISA provider will pay the funds directly to them.
  • You must buy the property with a mortgage

I have to note if you take out your money before the age of 60 and not to buy a house, you will be charged a penalty of 20% of the total pot (deposits, interest and government bonus). This is rising to 25% in April 2021.

Junior ISA

The junior ISA is for long term savings for a child under the age of 18 and resident in the UK. You can get a junior ISA in either a cash or stocks and shares function. A parent or guardian can open and manage a junior ISA, but the money belongs to the child. The child can take control of the account at the age of 16 but cannot withdraw any money until they are 18.

The cool thing about junior ISAs is that anyone can pay in money into the account. So if a relative wanted to contribute some money for the child’s future they could do so by bank transfer when the have the account details of the ISA. But remember that the maximum that can be contributed in a tax year is £9,000. When the child turns 18, the account will automatically turn into an adult account.

So if you want to save money for your child’s future university expenses, or towards their first home or wedding etc. This is the account to use.

 

None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.

One thought on “ISAs: Which ones should you have?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: