The low-down on ISAs

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If you're like most people, chances are, you always have good intentions when it comes to saving more money but it's quite possible you never get around to it like you ought to.

Perhaps you feel like you don't have much to spare or you are pretty confused about your savings options.

Procrastinate no more because we'll help you understand different ISA options that are available to you along with other savings vehicles that can help boost your savings rate.

What is an Individual Savings Account (ISA)?

Individual Savings Accounts (ISAs) are tax-free savings or investing accounts. This means the interest or capital gains you earn from your savings or investments are not taxed.

The amount of money you can place into an ISA changes from year to year, but the 2019/2020 amount is set to £20,000 of after-tax income.

Your allowance must be used up each year (by April) and cannot be rolled over from year to year.

What are the different types of ISAs?

There are six types of ISAs;

  • Cash
  • Help-to-Buy
  • Junior
  • Stocks and Shares
  • Innovative Finance
  • Lifetime

Let's take a look at some of the eligibility requirements and objectives for each.

Cash ISA

With a cash ISA, you essentially place cash into a savings account and any interest earned in that account is not taxed. The options are similar to the one offered for standard accounts: regular saver, easy access or fixed-rate bond. Your interest rate will be either fixed or variable.

The competition for ISA accounts is heating up and many banks are vying for customers' deposits with enticing interest rates. However, it's important to read the fine print when it comes to all the options. Many times, there are requirements that have to be met when opening the account or qualifying for the advertised interest rate.

A cash ISA is a good option for individuals with shorter-term savings goals and a low tolerance for risk.

Keep in mind with that with lower interest rates and lower returns, higher inflation rates (a general increase in prices and fall in the purchasing value of money) could eat into the value of your savings pot. But on the flip side, there will generally be less chance of large losses (or gains) in a cash ISA.

Help to Buy ISA

This savings account is designed to help first-time home buyers save up for a deposit on a home. You can start these accounts of with £1,200 but can only deposit £200 per month. If you want one, you need to open it by 30 November 2019.

You can earn up to 2.58% interest tax-free and then the government will add a 25% boost of free cash on top of what you save. These accounts are available at a number of banks, credit unions and building societies.

According to HelptoBuy.gov.uk, the eligible home must:

  • You need to be a first-time buyer in the UK.
  • You must be aged 16 or over.
  • You can use it to purchase any home worth up to £250,000 (or up to £450,000 in London).
  • You must intend to live in the house you are purchasing.
  • You must be purchasing your home with a mortgage.
  • You must not open a Help to Buy ISA and a Cash ISA in the same tax year (April to April each year).

So, what does this look like?

For example, if you save the maximum amount of £200 per month, the government provides an additional £50 every month, up to £3,000 towards your deposit on your home purchase.

Junior ISA

These ISAs are for UK residents under the age of 18 and allows for up to £4,368 in deposits each year. This ISA can be split between a cash ISA, or stocks & shares ISA.

The only real difference between this ISA and a standard ISA for an adult is the savings limit. For the junior ISA, the annual deposit limit is much lower compared to that for 18 and over which is £20,000 every tax year. When a child turns 18, the account is converted to a standard ISA.

Stocks & Shares ISA

This savings account allows you to choose from a range of investments whose capital gains (profits) are protected from taxation. Unlike a cash ISA, you can choose from many investment vehicles including funds, trusts bonds and individual shares.

The rate of return isn't fixed or variable in this case. It's solely dependent on the performance of your investments. If the value of your investments go down, so does the value of your savings pot.

This ISA is better suited to people who are comfortable with a higher level of risk set against the possibilities of higher rates of returns (or losses.)

Innovative Finance ISA

Introduced by the government in 2016, this one is a relatively new development in the world of ISAs.

It's designed to allow you to use some of you annual ISA allowance to lend through the growing peer-to-peer lending market, and receieve tax-free interest and a profit.

Peer-to-peer lenders are comapnies who claim to cut out the banks, and allow people to lend money to individuals who need to borrow money. The benefit being lower interest rates for those who are borrowing money, but also allowing investors to earn a better return than a standard ISA.

To qualify for this tax-free interest and capital gains, you have to lend money through FCA-regulated and approved peer-to-peer lending sites.

You can only have one Innovative Finance ISA and you'll only earn tax-free returns on the first £20,000 you invest, you are allowed to invest more in peer-to-peer lending if you choose to.

Like the stocks & shares ISA, peer-to-peer lending can be more risky than a standard cash ISA. Your returns are not guaranteed and your rates of return will be largely dependent on the performance of your peer-to-peer loan portfolio.

This investment vehicle is ideal for someone who understands peer-to-peer lending and is comfortable the potential for high rates of returns or losses.

Lifetime ISA (LISA)

This account is designed to help people with two lifetime events: a home purchase or retirement.

Individuals must be between the ages of 18 and 40 to open this account. You can contribute up to £4,000 in a LISA per year, but this is also part of your £20,000 annual ISA contribution limit. This account can be a cash ISA, or stocks & shares ISA or a combination of both.

If you decide to purchase a home with this account, you have the option of keeping the account so you can continue to save for retirement. Like the Help to Buy ISA, this account also comes with a government bonus of 25% on your contributions.

If you contribute £4,000 per year in a LISA, the government will add another £1,000 (25% of £4,000) each year until you turn 50. The bonus amount is capped at £33,000 assuming you open your account at 18 and max it out each year until you turn 50, as you approach later life and retirement.


What now?

If you're not sure which ISA is right for you, it will all boil down to your level of risk tolerance and actual financial needs.

First, find out what it is you expect your savings to accomplish for you, then know your appetite for risk and uncertainty.

From this point, you'll want to find a bank or provider who offers the right kind of accounts, incentives and service-level that meet your needs.

Once you understand the purpose of your savings accounts and your 'savings personality', you'll be in a better position to choose the best savings vehicle to help you accomplish your goals.

To find out more about the terms and eligibility requirements around, ISAs here are some helpful resources:

Individual Savings Accounts Help to Buy ISA