ISA'bout understanding

Most of us are missing the opportunity to make the most of our hard earned cash (and tick a few additional items off our bucket list). But making the most of your money isn't actually that hard: all you have to do is put the right amounts in all the right accounts. You'll see savings and investment recommendations as part of your personal financial plan.

The challenge is that there's an overwhelming choice of savings and investment products out there. It isn't easy to understand what they all do or what the differences are and the language is often inaccessible. And having too much choice makes it all the more tempting to pull an ostrich move and bury your head in the sand.

Not so fast. Over the coming weeks we'll be running a series of articles to demystify investment terms and make sure you're fully on board with your plan recommendations. Today we're talking ISAs.

Let's start with the basics. An ISA is an Individual Savings Account for UK residents. From the age of 16 you can save up to £20,000 a year in a cash ISA, but when you hit 18 a new range of options opens up.

So here are the six main types of ISAs.

Cash ISA

This is a really simple one. Essentially it's like having cash in an interesting-earning bank account, but your interest is protected from the tax man.

The good & the bad

A low-risk way to save for a holiday or a new bathroom - so all your short term needs and a few of those cheeky wants too.

On the flip side, the returns are not great and accounting for inflation you could end up losing money in real terms.

Help to Buy ISA

The deadline for opening a Help to Buy ISA was 30th November 2019. For those of you who have one, good job on getting a 25% uplift from the government. The good news is, you can continue to use this to save towards your first home.

Stocks & Shares ISA

This is a great way to invest in stocks and shares, funds, and bonds with different risk profiles to suit all but the most cautious amongst us. In addition you can do it without worrying about the tax implications. Yes, you did read that right, no income or capital gains tax for these bad boys.

The good & the bad

These are suited to the medium and long term, so anything you are looking to do beyond five years. Feel like taking a sabbatical, or sending your kid to uni? This may be a great way to make it happen.

It's worth noting that recent studies have shown that those who maxed out on their ISAs between 1999 and 2019, got over £47,000 more than those who invested in a Cash ISA. They could have brought themselves a Model 3 Tesla with that and had money left over for a luxury 2-week holiday in the Maldives.

Be warned though: stock markets are not a one-way street and they go down as well as up, much like the housing market. So there's always some risk in investing, but historically they have performed well over the long term.

Lifetime ISA

These are ideal for the medium and long term tax-savvy investor. They cater for a whole range of risk types as they invest in everything from cash to stocks and shares. But the best thing about these is that the government will add a bonus of up to 25% of anything you put in. Your contributions are capped at £4,000 per year and there are strict limits around age.

The good & the bad

Amazing if you are buying your first house or are saving for your silver surfer years. If can you see yourself in your 60's wearing a bandanna cruising round Europe on your brand new Harley, this may be a great way to make that happen

The bad thing about them is the conditions. It's only for those looking to get on the property ladder or save for their later years.

Innovative Finance ISA

These are the baby of the ISA family and have only been around a little while. They match people who have money with people who need it, and put it in a convenient tax-free wrapper. Much like the stocks and shares ISA, these are for your medium to long term goals.

The good & the bad

The potential return on these is much higher than traditional savings accounts or ISAs. But they also come with more risk as you are investing in new businesses or individuals. So unless you are willing to spin the wheel and put it all on black, you should only consider these for a portion of your investment.

Junior ISAs

These are for parents with kids under 18. Like all ISAs, these are tax free but it's really just a way of putting money aside for your kids. The current annual allowance is £4,368 per child and parents can save this amount in addition to their £20,000 personal allowance.

The good & the bad

It gives your kids a great start, but beware they and they alone can access this when they are 18. So if your little darlings get a windfall like that you would want to make sure they don't blow it all on sex, drugs, and rock and roll.

The TL;DR

ISAs are a tax efficient way for saving for anything from your short term desires to your long term needs. They can generate some pretty impressive returns if you are willing to take some risk. On top of that, the government even gives you cash of up to £1,000 per year with certain products.

Even after this simple explanation, there are still so many things to think about; who to use, how much, how long, performance, conditions and overlaps with over investments.

So rather than get choice paralysis your best bet is to get some truly independent financial advice to find out how to use ISAs. With the end of the tax year fast approaching, timing is everything. To make the most of your personal allowance for the current year you need to get your skates on as there is less than a month to go. Luckily, you're just a few taps away from your very own personal financial plan. Go get it!