Get to know ISAs

Ever wondered what an ISA is and why these 3 letters are so important? We’ve got you covered (and no, they’re not just for retirement). ISA’s can take your personal finances to the next level, with different types to choose from, they all serve their own purposes and offer advantages you can benefit from no matter what your financial goals are.

What is an ISA?

ISA stands for Individual Savings Account. 

There are a few types of ISAs, but they all share one thing in common - they have a tax advantage. Every tax year you have an ISA allowance in the UK that lets you save or invest money up to a certain amount without paying tax on your returns or any interest you earn. Currently, the allowance is up to £20,000 per UK tax year in one type of account, with the exception of Lifetime and Junior ISAs, or you could split the allowance across some or all of the other types of ISAs.

Essentially, their aim is to encourage UK residents to contribute towards their financial future.

Cash ISAs

Do you have a savings account? Well, Cash ISAs are similar to your traditional savings account, with the exception that you aren’t required to pay any tax on the interest that you earn. 

Some offer options to withdraw your money instantly or on a fixed-term basis where your money is locked away for a certain amount of time (perfect for those of us who are always tempted to dip into savings!).

Whilst saving your money in a Cash ISA has the advantages of not paying tax on your interest and the potential of your interest compounding over time, if the interest rate is lower than the rate of inflation, your money may lose its value over the long-term period.

The minimum age you can open a Cash ISA is 16.

Stocks and Shares ISAs

Stocks and Shares ISAs, also known as Investment ISAs, allow your money to be invested into assets such as (you guessed it) stocks and shares, and various other options such as funds, ETFs, and bonds.

With a Stocks and Shares ISA, you won’t have to pay any capital gains tax, so for example if you sell a share at a profit, or any tax on dividend payments. By simply investing through this ISA, it allows you to keep all of your returns up to £20,000 (unless you are splitting the allowance across other ISAs) and build your wealth further. However, as with any investment vehicle, there is the risk that you could lose your money as there are no guaranteed returns when investing.

The minimum age to open a stocks and shares ISA is 18.

Innovative Finance ISAs

With an Innovative Finance ISA,  you can invest your money through peer-to-peer lending. This is when you lend your money to individuals or businesses through peer-to-peer lending platforms which match lenders with borrowers. 

Similar to Stocks and Shares ISAs, you are not taxed on any of the returns you make up to £20,000 (unless you are splitting the allowance across other ISAs), meaning that you can keep all of your funds.

The minimum age to open an Innovative Finance ISA is 18.

Lifetime ISAs 

With a Lifetime ISA, you can save for retirement or your first home with either cash or stocks and shares invested through this account. The maximum limit for this account is £4,000 a year, with an additional 25% bonus from the government on top of the amount you’ve saved within the limit (yep, free money!).

Whilst this account allows you to save and invest your money in a tax-advantaged environment and even receive a bonus on your savings, there are a few things to keep in mind about Lifetime ISAs:

  • You can only open a Lifetime ISA account between the ages of 18-40.

  • You can not contribute to your Lifetime ISA or receive the additional government bonus once you turn 50.

  • You can’t access the funds in your account until you turn 60, unless it’s to buy your first property or you are terminally ill, with less than 12 months to live. 

  • If you do withdraw money under any other circumstances unauthorised, you would have to pay a withdrawal fee, which currently sits at 20% but will increase to 25% from 6th April 2021, and recovers the bonus on your savings you’ve received from the government. 

If you’re buying your first home with a Lifetime ISA:

  • The property has to cost £450,000 or less.

  • You have to buy the property through a mortgage.

  • You have to buy the property at least 12 months after you make your first payment into the Lifetime ISA.

  • You need to use a conveyancer or solicitor for the purchase.

Whilst there are a number of restrictions with the Lifetime ISA, it holds many benefits for long-term saving or if you want to buy your first property with the support of the government.

Junior ISAs

Junior ISAs are long-term, tax-free savings accounts for children with a £9,000 allowance per tax year. Parents or guardians of a child under 18 can open a Junior ISA to save or invest (or both) on behalf of the child, but any money in the account belongs to the child. The child takes control of the account once they’re 16, but can’t withdraw any money until they turn 18. 

By now, we’ve lost track of how many times we’ve said ‘ISA’ in the last few minutes, but we hope this gives you a clear understanding of the differences between each type. There’s no doubt that they can be advantageous to your financial future, but choosing the right ISA/s purely depends on your own financial goals. 

The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.