A Short Guide to Different ISA Types
ISAs (Individual Savings Accounts) are commonly heard about, but not always understood. Introduced in 1999 by the UK government, they are intended to encourage individuals and families to save by offering a tax-free “wrapper” for people’s savings.
In 2019-20, you can commit up to £20,000 per year into your ISA(s) without any of it liable to tax, including taxes on capital gains and interest on your investments.
This might sound simple enough, but there are a range of different ISAs currently available on offer which can complicate the picture. Each type of ISA is intended for specific purposes, which we will outline here.
Please note that this content is for information purposes only, and should not be taken as financial advice. To receive regulated, tailored advice regarding your own financial situation, please consult an independent financial adviser (such as those here at Castlegate).
Cash ISA
This is similar to a regular savings account with your bank. To open a Cash ISA, you need to be at least 16 years old and be resident in the UK.
A Cash ISA is typically seen as a good option for storing money which you might need to access quickly. A normal savings account will usually levy Income Tax on any interest earned over £1,000 within a tax year, whilst a Cash ISA will let you earn interest tax-free.
On the other hand, Cash ISAs are not normally regarded as a viable investment vehicle. At the time of writing (and for the foreseeable future), inflation is likely to outstrip any interest on your Cash ISA money – meaning your spending power is likely to fall over time.
A Cash ISA can be a useful place to store emergency savings, for example. However, if you are looking to grow your money over time, then you might want to consider other options available to you rather than simply committing everything to a Cash ISA.
Lifetime ISA
A Lifetime ISA (or LISA) is specifically intended to allow you to save money towards your retirement and/or first home purchase. Any income or capital gains generated by money in your LISA is, like other ISAs, free from tax.
The main attraction of the LISA is the government “top-up”. Essentially, for every £4 you put into a LISA you will get £1 from the government. So if you put in £4,000 (the limit you can put in every tax year), you would get a 25% “return” from the government (i.e. £1,000).
There are certain conditions attached to LISAs which are important to be aware of. First of all, you can only open one if you are aged between 18-39. Secondly, you can only access the funds for use toward your pension once you are over the age of 60. The main exceptions where you can access the money earlier involve committing some/all of your LISA money towards buying your first home, or if you have been diagnosed with a terminal illness.
If you want to use LISA funds towards a property purchase in 2019-20, then it must be valued at under £450,000. Your account must also be at least 12 months old before you can commit any of the funds towards a property purchase.
Stocks & Shares ISA
This type of ISA is similar to a Cash ISA in some respects but is geared more towards producing an investment return rather than acting as a repository for short-term savings.
A Stocks & Shares ISA lets you invest your money into assets such as property, bonds and company shares – without attracting tax on your investment returns. To open an account you must be resident in the UK, and over the age of 18.
The potential upside of this ISA is that it opens up the possibility of increasing your money over the longer-term, through strong investment returns. The downside is that there is risk involved with this type of ISA, and the value of your investments might go down.
Innovative Finance ISA
If you’re interested in investing in small businesses, then an Innovative Finance ISA allows you to act as a direct lender to these businesses. By loaning money to these companies through this ISA, you can potentially generate a return by generating tax-free interest on your loans to them.
This direct link between borrower and lender cuts out the “middleman” (i.e a bank), presenting the opportunity to generate a higher investment return. However, there is also a greater risk that you might lose money due to the possibility of borrowers defaulting, and not paying you back.
Junior ISA
This ISA replaced the Child Trust Funds (CTFs) when it was launched in 2011, enabling children to save towards their future in a tax-efficient manner. The conditions are that the child must not have a CTF, they must be under the age of 18 and also live in the UK.
In 2019/2020, the maximum amount that can be put into a Junior ISA is £4,368. Your child has the choice of opening up a Junior Cash ISA or Junior Stocks & Shares ISA, although they can only have one of each. In either case, the Junior ISA will be owned by the child (not parents).
