Can you Name the 7 Different Types of ISAs?
There are 7 different types of ISA (Individual Savings Account) available to savers, each work slightly differently and carry different benefits. The ISA most suitable for you will be dependent on your saving goal.
It is important to note that for the 2017/18 Tax Year the ISA allowance is £20,000, this is across all ISAs; you cannot place £20,000 in a Stocks & Shares ISA and then place an additional £20,000 in a Cash ISA.
Here we take you through the 7 different ISAs to help you decide which one is best for you…
Cash ISA
How does it work?
This along with the ‘Stocks & Shares’ ISA is the most popular and well known type of ISA. It is a tax efficient way of saving as it used to shield savings from both capital gains and income tax.
You must be 16 years old to open a Cash Isa and for the 2017/18 tax year the allowance is up to £20,000. Interest is then paid on the money you have saved.
Pros
- Good for short term savings
- Capital is protected
Cons
- Interest rates are currently low
- When interest rates are low and inflation is high the real value of money held in cash is actually decreasing
Stocks & Shares ISA
How does it work?
The Stocks & Shares ISA works in the same way as a ‘Cash ISA’; in that it is a tax efficient way to save and has an annual allowance of up to £20,000.
However, this is where the similarity ends, to open a Stocks & Shares ISA you must be aged 18. The main difference is that when you place your money into a Stocks & Shares ISA it is invested into funds, bonds and shares.
Pros
- Likely to produce a higher level of return over a long period compared to a Cash ISA
- Any gains made will be free of capital gains tax
Cons
- You may get back less than originally invested as your investment isn’t protected
- If you are saving for the short term this may not be the best option for you
Junior ISA
How does it work?
The Junior ISA allows parents to save money on their child’s behalf without using their own ISA allowance. The allowance traditionally is lower than a Cash or Stocks & Shares ISA; for the 2017/18 tax year the Junior ISA annual allowance is £4,128.
For a Junior ISA, the child you nominate must be under the age of 18. The parent opening the ISA must be over the age of 16 and a UK Resident. Once the Junior ISA is open other people such as grandparents or aunts and uncles can make contributions.
When the child reaches 16 they are in given control of the fund within the ISA however they are unable to make any withdrawals until their 18th birthday, when the Junior ISA converts into a basic Cash or Stocks & Shares ISA.
Pros
- Long-term tax-free savings
- Low level of risk
Cons
- Relatively low annual allowance
- If an emergency arises before the child reaches the age of 18 the money still cannot be accessed
Help to Buy ISA
How does it work?
The Help to Buy ISA was introduced to help people to purchase their first home. When you open your account, you can deposit a lump sum of £1,200 and then contribute up to £200 a month into the Help to Buy ISA. The government will then top up the savings with a 25% bonus. Savers will need to save a total of £12,000 to qualify for the maximum government bonus of £3,000. To open this type of ISA you must be over 16 and have never owned a previous property.
Pros
- Each individual gets their own account, so if you are buying as part of a couple you can qualify for a maximum £6,000 bonus
- A wide range of providers offer the Help to Buy ISA
Cons
- The bonus is only paid at the point of completion so cannot be used towards your deposit
- There is a cap on the value of the property you use for the Help to Buy ISA. In London, this is £450,000 and for the rest of the country is it £250,000; limiting you to the property and area of the purchase.
Flexible ISA
How does it work?
A Flexible Cash ISA allows you to withdraw money from the ISA and then put back in the same financial year without losing any of the annual tax-free allowance. It is important to be aware that not all providers offer flexible ISAs.
Pros
- Allows access to your money in an emergency without losing tax benefits
Cons
- Withdrawals from a Flexible ISA can only be replaced into the same account within the same tax year
Innovative Finance ISA
How does it work?
The Innovative Finance ISA provides a wrapper for savings via peer-to-peer (P2P) loans. The money placed in an Innovative Finance ISA is then loaned to another individual or start up business. You will then earn a return based on the interest paid by the borrower.
Pros
- Interest rates are likely to better than that of a Cash ISA
Cons
- P2P lending is untested in a credit downturn, as there are no underlying guarantees.
- Not many providers yet offer this product.
Lifetime ISA
How does it work?
The Lifetime ISA (commonly known as the LISA), which was introduced this tax year, aims to help people save for their first home and/or retirement. Like with the Help to Buy ISA the government offer a 25% bonus on the money saved into it; the 25% bonus will not be applicable to any interest earned.
To open a LISA you must over 18 but under 40 and a UK resident. The LISA has an annual allowance of £4,000 and the maximum bonus the government will pay out is £32,000 (if an individual opened the LISA at the age of 18 and saved the maximum contribution until the age of 50).
Pros
- The maximum property value to be used with a LISA is £450,000 which is higher than that allowed with a Help to Buy ISA.
- Generous 25% bonus
Cons
- If the funds from a LISA are not used for a house purchase then they must remain invested until the age of 60; otherwise a 25% exit charge will apply.
- Not considered the most effective way to save for retirement for example a workplace pension will have employee contributions matched by the employer.
- Not many provers yet offer this product.
Please speak with a KDW adviser to discuss which ISA is the best for your situation.
PAST PERFORMANCE IS NOT NECESSARILY A GUIDE TO FUTURE PERFORMANCE. THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM CAN FALL AS WELL AS WELL AS RISE AND YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED.