A simple look at the different types of ISA in the UK

A Simple Look at the Different Types of ISA in the UK

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With the deadline for using up your annual ISA allowance fast approaching, many people will be wondering which type of ISA is right for them.

Should you stick with a simple Cash ISA or should you try a Stocks and Shares ISA instead? What about the newer additions to the ISA family such as Innovative Finance ISAs and Lifetime ISAs? Might one of these be worth consideration?

In this post, we take a simple look at each of the different ISA types currently available in the UK. This will help you to decide which might work best for you.

Cash or Investment ISA?

Before we look at the different types of ISA, let’s just mention the difference between Cash and Investment ISAs.

When thinking about subscribing money to an ISA, the first thing you will want to decide is whether you want to save or invest your money.

Cash ISAs are simply savings accounts with the benefit of earning tax-free interest on your savings. This means that your capital will be safe when you place it in a Cash ISA. There is no risk that you will wake up tomorrow and find that 20% of your money is gone due to a badly performing investment.

The price you may pay for this security, though, is that savings rates are historically low right now. This means you probably won’t earn a lot of interest on your money. That being said, you may sleep better knowing your money is safe.

Investment ISAs offer the prospect of better returns if you are savvy with your money. The trade off with Investment ISAs is that your capital is at risk. So, if you invested your money into a badly performing fund or share, there’s the risk that you could literally lose it all. While that is an extreme example it is worth knowing the worst case scenario.

Now that we’ve explained the difference between Cash and Investment ISAs, let’s look at the more specific types of ISA on offer in the UK.

Cash ISAs

Let’s begin with the humble Cash ISA.

As we mentioned earlier, Cash ISAs are savings accounts. This means that the money you place into a Cash ISA is safe and the capital is not at risk.

Your money will also be protected by the FSCS up to the current limits. So, in the unlikely event that your ISA provider collapses, your money will be covered by this government scheme.

You can invest all or part of your £20,000 ISA allowance into a Cash ISA and any interest you earn on your savings will be free of income tax.

Stocks and Shares ISAs

Stocks and Shares ISAs are investment ISAs and this means they carry a risk to your capital.

One of the pros of Stocks and Shares ISAs, however, is that they have historically provided much better returns than Cash ISAs.

Any money you make through dividends or capital gains in a Stocks and Shares ISA will be free from tax. This is a huge benefit if you were planning on investing anyway.

Be sure to do your research when you choose a Stocks and Shares ISA provider, as the fees charged can differ considerably. Over time these fees could really make a difference to your potential returns.

Remember too that there is no guarantee on future returns, as the value of investments can rise as well as fall.

Again, you can invest your entire annual £20,000 allowance into a Stocks and Shares ISA or you can split this across various ISA types.

Innovative Finance ISAs

Innovative Finance ISAs or IFISAs were introduced by the government in 2016.

They allow those who wish to participate in peer to peer lending to do so with the added tax benefits that come with ISA investing. 

IFISAs are investment ISAs and because of this your capital is at risk. There is also no FSCS protection included with IFISAs.

As IFISAs are still relatively new there are only limited providers at this time. The list of providers is growing steadily, however.

We recently reviewed two IFISA providers on this blog in easyMoney and RateSetter.

Again you can invest your full £20,000 ISA allowance in an IFISA or just some if you’d prefer.

Lifetime ISAs

Lifetime ISAs exist to give a financial boost to those who wish to save for retirement or their first home.

With Lifetime ISAs the government will pay a 25% bonus on the money you subscribe during each financial year. The maximum you can subscribe in any given tax year is £4000 and the maximum annual bonus is £1000.

While this is a great scheme if it is right for your circumstances, it should be noted that you will have to pay a 25% withdrawal fee if you withdraw your money before you’re 60 or if you don’t use the cash to buy your first home.

To open a Lifetime ISA you will need to be aged between 18 and 39.

Help to Buy ISAs

The Help to Buy ISA is being phased out at the end of November 2019. So, if you want to get one you will need to do so before then.

Help to Buy ISAs exist to help first time buyers get on the property ladder by boosting their home deposit.

As with Lifetime ISAs, Help to Buy ISAs offer a 25% government top-up bonus on money deposited. The rules on how much you can deposit and how quickly you can access your money do differ, though.

As Help to Buy ISAs won’t be available for too much longer, we won’t go into too much detail here. Feel free to do your own research if you think that it might be the right ISA for you.

Junior ISAs

Juniors ISAs enable you to save or invest for your child’s future with the tax benefits that ISAs bring.

While the tax benefits are the same as those offered by adult ISAs – in that there is no tax to pay on income or capital gains – the amount you can subscribe to a Junior ISA is lower.

The Junior ISA allowance is currently £4,260 for the 2018/19 tax year. This will be rising to £4,368 for the 2019/20 tax year.

It’s important to know that any cash you subscribe to an ISA will not be accessible until your child turns 18. Your child can take control of their ISA when they turn 16, but not withdraw the money.

You can move you Junior ISA from one provider to another, but you won’t be able to withdraw any of the money you put in.

Summary

As we can see, there are no shortage of ISA types available in the UK. Whether you want to save or invest your money, an ISA can be a great way to do this as due to the tax benefits available.

We hope you’ve found this simple look at the different ISA types useful and that we’ve highlighted a few of the pro and cons for you too.

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