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The A to Z of ISAs

View profile for Trey Vella
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Do you know your Stocks and Shares ISA from your Cash ISA? How about your Lifetime ISA from your Innovative Finance ISA?

When it comes to Individual Savings Accounts (ISAs) there are various options available and it can feel overwhelming trying to understand what sets them apart from each other. But don’t worry, this blog sets out the key differences between each product.

There are four main types of ISA available to adults;

  • Cash ISAs,
  • Stocks & Shares ISAs,
  • Innovative Finance ISAs and,
  • Lifetime ISAs.

The maximum you can invest in any of these ISAs is £20,000, which is the annual allowance for the 2019/2020 Tax Year. You can also see how to make the most of your ISA allowance here.

So, what are the differences between each ISA?

Cash ISA

Cash ISAs are similar to your traditional savings accounts. You can open a Cash ISA if you are a UK resident aged 16 or over. The benefit to a Cash ISA is that you do not have to pay tax on the interest you receive, whereas you may have to pay tax on interest from a Bank or Building Society savings account. However, one thing to keep in mind is the interest rate available from a Cash ISA. If the interest rate is poor you may run the risk of your savings being eroded by inflation.

Stocks & Shares ISA

Stocks & Shares ISAs allow you to invest your money into assets such as bonds, shares, property, commodities and various other financial instruments. No Tax is payable on Capital Gains made within the product or on any income received. You must be a UK resident aged 18 or over in order to open a Stocks & Shares ISA.

Stocks & Shares ISAs may offer the potential for an increased rate of return over Cash ISAs, but this is often coupled with a higher level of risk and should be viewed as a medium to long term investment.

Lifetime ISA

Also commonly known as LISAs, allow you to save up to £4,000 per year towards buying a first home or towards your retirement. The government will add a 25% bonus on top of your own savings which means that up to an additional £1,000 is up for grabs annually! You must be a UK resident and aged over 18 but under 40 to open a Lifetime ISA.

Money can only be withdrawn to purchase your first home or once you turn 60 (or in in exceptional circumstances where you are terminally ill) – if you withdraw funds before or for any other reason, there will be a 25% charge on the amount you withdraw.

There are additional rules and conditions to using a Lifetime ISA which should always be checked prior to opening this type of ISA.

Innovative Finance ISA

An innovative finance ISA is a type of ISA that adds a tax-free wrapper to savings income from peer-to-peer lending. Innovative finance ISAs can only be offered if approved by HMRC as an ISA manager and are only available to investors who are 18 or over.

Direct peer-to-peer lending negates the need for a Bank which means that there is a potential for higher rates of interest. Due to their nature, Innovative Finance ISAs can be more complex than other types of ISA.

In addition to the four different adult ISAs there is also the Junior ISA, also known as a JISA. Junior ISAs replaced Child Trust Funds and enable parents to save or invest for their Children Tax efficiently. You can open a Junior ISA for a child providing they are a UK resident, under the age of 18 and don’t already have a Child Trust Fund.

Junior ISAs have an annual allowance of £4,368 in the 2019/2020 Tax Year. You can open a Junior Cash ISA or a Junior Stocks & Shares ISA. However, unlike an adult ISA only one of each type can be opened for a child in their lifetime.

A child can take over management of a Junior ISA from the age of 16, however they cannot withdraw money until the age of 18.

We hold annual seminars in Colchester and Chelmsford where we talk about ISAs and options available, amongst other subjects. If you would like further information visit our events page.

If you have any queries in respect of your financial arrangements, please do not hesitate to contact me. I am based in our Colchester office and can be reached on 01206 217 329 or trey.vella@birkettlong.co.uk.