This is the first in a series of articles all about ISAs and how to make the most of them.
It’s important to note that this does not constitute personal advice and if you’re not sure whether an investment or savings account is right for you please seek professional financial advice.
ISAs (individual savings accounts) can be a great way of saving because they come with government incentives, including saving up to £20,000 tax free each year.
Choosing which type of ISA is right for you can be complicated, so I’ve outlined the key aspects of the main types. Excluding Junior ISAs these are: Lifetime ISA (LISA), Help to Buy ISA, Stocks and Shares ISA, Cash ISA and Innovative Finance ISA.
These are probably the most straightforward type of ISA, as they simply allow you to hold up £20,000 in cash on a tax-free basis. You can withdraw the money at any point without facing a penalty, meaning these can be good for those wanting greater flexibility from their savings.
As its name would suggest, this is not designed to be a short-term investment.
To open a LISA you must be over 18 but under 40 and once opened you can put in up to £4,000 a year until you turn 50. The government will add a 25 percent bonus to your savings, up to a maximum of £1,000 per year.
After your 50th birthday you will not be able to pay into your Lifetime ISA or earn the government bonus, but the account will stay open and your savings will still earn interest or investment returns.
There are only three criteria by which you can withdraw the money without a penalty charge. These are: if you are buying your first home; if you are aged 60 or over; or if you are terminally ill and have less than 12 months to live.
The withdrawal charge is designed to recover the government bonus you received on your original savings. Currently this stands at 20 percent but is increasing to 25 percent from 6 April 2021.
Help to Buy
Although this is now closed to new consumers, it has proved particularly popular with young people looking to get on the property ladder.
If you already have a Help to Buy you can pay in up to £200 a month. When it comes to buying your first home the government will top up your savings by 25 percent – to a maximum of £3,000 – as long as it costs no more than £250,000 or £450,000 in London.
While you cannot now open a Help to Buy ISA, you can pay into your existing account until November 2029 and claim the 25 percent bonus until November 2030.
If you are buying with someone who also has a Help to Buy ISA, you are both eligible for the 25 percent bonus.
If you have both a LISA and a Help to Buy, you can only make use of one government bonus.
Stocks and Shares
This can be a good introduction into investing for those looking to get involved in the stock market. Due to the obvious volatility of the stock market, any you shouldn’t normally be expecting to draw on any money you put into a Stocks and Shares ISA for at least five years.
Stocks and shares ISAs can include: shares in companies; unit trusts and investment funds; corporate bonds; and government bonds.
Unlike the others, returns are not guaranteed, and you could end up with less money than you originally invested, but while interest rates are so low it could be a good way of increasing your returns.
You cannot transfer any non-ISA shares you already own into an ISA unless they’re from an employee share scheme.
Innovative Finance ISA
These work much the same as a Cash ISA, but – like a Stocks and Shares ISA – returns are not guaranteed as you’re investing in businesses and how they will perform in the future cannot be known.
An Innovative Finance ISA can include the following investments: peer-to-peer loans (loans that you give to other people or businesses without using a bank); and ‘crowdfunding debentures’ – investing in a business by buying its debt.
You cannot transfer any existing peer-to-peer loans or crowdfunding debentures you already hold into an innovative finance ISA.