This time of year, you can’t move without someone talking to you about ISAs. But what exactly is an ISA? In this article, we take you through the basics of what an ISA is and how they work.
ISA stands for ‘Individual Savings Account’. It’s a tax-efficient savings or investing account that anyone over the age of 18 (or 16 for a cash ISA) with a UK national insurance number can put up to £20,000 a year in, tax-free.
The cash ISA
A cash ISA works in much the same way as an ordinary savings account, except you do not pay tax on the interest you earn. While returns are low – typically less than 1.5% – a lot of cash ISAs allow you to withdraw your money at any time. Plus, as these are bank deposits, up to £85,000 is protected by the Financial Services Compensation Scheme (FSCS).
The stocks and shares ISA
Alternatively, if you are willing to be a bit bolder with your money, you can choose a stocks and shares ISA. This option also comes with the same tax benefit as a cash ISA but rather than just holding your money in cash, it is invested in the shares of listed companies. This allows you to make higher returns if these companies perform well, but you could risk losing money if they don’t.
The other ones
There are also a few other kinds of ISAs on the market, offering different tax-benefits for different people:
- The Innovative Finance ISA (IFISA) which allows you to invest in peer-to-peer and crowdfunding platforms in things like companies or properties.
- Junior ISAs that let parents save and invest on behalf of a child under the age of 18, in this case, the tax allowance is in addition to the parents’ individual allowance.
- Help-to-buy ISAs which are designed to help people save a deposit for their first home. With these cash ISAs, you can save up to £3,400 in your first year and £2,400 a year after that. The government then adds a 25% bonus up to £3,000 as long as the money is used to buy your first home.
- The Lifetime ISA (LISA) which can be opened by anyone between the age of 18 and 40 and has an annual limit of £4,000. Contributions can be made up until the age of 50.
Whatever you’re saving for, an independent financial adviser can help you make the right decisions about the right ISA or combination of ISAs to meet your savings goals.