Which type of ISA is for me?
Different people do different things with their savings. Some people are investment wizards, others choose to stash it under their mattress. For those of us who are in between the two, or maybe just want to keep our cash split between the memory foam and somewhere that works harder for our money, there’s the ISA.
What is an ISA?
Skip straight to the juice (the ISA types) if you already know what this is. For those that don’t, the term ISA stands for ‘Individual savings account’. They let you save tax-free into a cash savings or investment account to watch your money grow.
You can get one from banks, building societies, insurers, asset managers and National Savings and Investments (NS&I).
What are the different types of ISA?
Money is the means that connects you to your big goals. Those aren’t any old goals so you shouldn’t accept your hard-earned cash going into any old ISA. Knowing the different types means you’ll be able to get the most from your money.
Pretty much the same as a regular savings account but there is a £20,000 limit on the amount you can put into it each tax year and you don’t pay any tax on the interest from your savings. There are typically three different types of cash ISA that may suit your needs depending on how flexible you are with accessing your money:
Fixed-rate ISA: As the name suggests you’ll agree to have an interest rate that is fixed for a period of time, but in exchange, your money will be locked away. The longer the term, the higher rate of interest you’ll be rewarded with.
Instant cash ISA: You can put into and take your cash out of this one whenever you want (some accounts might put limits on this though). The flexibility means you’ll get a variable interest rate on your savings that could be lower.
Regular savings cash ISA: You get a fixed rate of interest with this one within a set time but you’ll have to put in an agreed-upon amount every month. You can put in up to £1,666 every month without going over the £20,000 per year limit.
Stocks and shares ISA
This one is an investment account, where all capital gains and income are protected from tax. For 2020 the limit is anything up to £20,000, but you would have to deduct any amount that you might have paid into a cash ISA. You can either have your account managed for you or take the investment bull by the horns and choose where you invest your money. The latter will possibly still include a fee to the provider.
Your investment experience, how much you can afford to lose and your attitude towards risk should be carefully considered before you pick your investments as there’s a chance you’ll get back less than you put in.
Innovative finance ISA
This option is sometimes called ‘IfISA’ and includes peer-to-peer loans. What’s that? Well, it matches investors (that’s you) with borrowers who don’t or can’t get a bank loan. Usually, this is businesses, individuals or property investors. The borrower offers a rate of interest on repayments and in general the higher the interest rate the bigger the investment risk.
One for the big long-term goals. It’s government-backed and aimed at first-time homebuyers or those saving for retirement. You can choose between cash or stocks and shares options for this one and put aside up to £4,000 a year which counts towards your £20,000 ISA allowance.
The government pays a 25% bonus on top of anything you save into it, up to £1,000 a year. The government top-up is paid into your Lifetime ISA account each month.
Using it for retirement? You can pay into it until you’re 50 and withdraw it when you hit 60.