Navigating the world of personal finance can often feel overwhelming.
However, Individual Savings Accounts (ISAs) offer a straightforward way to save and grow your money tax-free.
With a surge in popularity, evidenced by the £3.5 billion deposited into cash ISAs this February alone (according to Bank of England data), understanding the nuances of these accounts is more crucial than ever.
We spoke with finance experts to demystify ISAs, outlining who they’re for and the advantages of each type.
What is an ISA? Can you have more than one ISA?
Rachel Springall, finance expert at MoneyFacts explains that an ISA offers savers the possibility to put away money that doesn’t get taxed. You can have multiple ISAs.
“That draws people to ISAs as they can invest up to £20,000 a year which is tax free. If you do withdraw that money however, it will become taxable,” Springall says. “Therefore if people want to move around their ISA, they will need to transfer it to another one.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, emphasises that it’s important people are thinking about making their savings and investments tax efficient to ensure they can hold on to as much of their earnings as possible.
She also adds it is worth noting that if the full allowance of an ISA isn’t used within the 12 month period, you then lose it and a fresh one starts for the next year.
Although Springall says that ISAs can encourage saving habits, they may not be for everyone. “It is important to remember that ISAs were introduced 25 years ago and they aren’t the suitable choice for everyone. It really depends on who you are, how old you are and what you’re saving for,” Springall adds.
General cash ISAs
“Cash ISAs are saving accounts where you don’t pay tax,” Haine explains. “Similar to a regular savings account, you can have an easy access or fixed-rate option where cash can be locked away for a set period. You can open one through your bank or your investment platform. I would advise people to shop around for the best rate they want and then allow your cash savings to grow over time.
“Generally these are better for those who are saving money for a short-term time horizon or who need access to the money faster.”
Stocks and shares ISAs
“A stocks and shares ISA allows savers to invest in shares, funds, investment trusts and bonds with no tax on any gains or income from assets held in the account,” Haine explains.
“They are best for those with a time horizon of five years or more because as we’ve seen recently, financial markets, especially equities, can be very volatile over the short term. Over the long term however, they’ve historically delivered much higher returns than cash over a period of five years or more.”
“With this ISA, a DIY investor could choose their own investments, and can spend time selecting the assets that they want that match their attitude to risk and manage their performance,” she adds.
She adds that some investment platforms also offer ready-made portfolios or off-the-peg investment portfolios – typically tailored to different levels of risk. This then allows investors to choose if they want to put their money in a ready-made portfolio.
Junior ISAs
“Children are eligible for an ISA too and with a junior ISA they have an allowance of £9,000 every tax year,” Haine says. “This is often a popular way for parents or grandparents to build up tax-efficient savings and investments for a chid. This money can be held in cash or investments.
Lifetime ISAs
“A lifetime ISA is specifically designed for meeting two goals – either to help purchase the first home or to save towards retirement. Importantly, the lifetime ISA has a maximum that you can contribute per tax year which is up to £4,000,” says Haine.
“These are available for people age between 18 and 39 and the government will then top up their contribution by up to 25% – meaning that’s a free cash bonus effectively.
“When it comes to lifetime ISAs however, the pot must either go towards the purchase of your first property – which is capped at £450,000 in value or it must be held until the individual turns 60 to be used for their retirement.”
Innovative ISAs
“An innovative ISA typically enables savers to engage in peer-to-peer lending – people can lend up to £20,000 to borrowers and businesses without getting their money taxed. These are typically for people who like to take on a little bit more risk,” Haine says.
