In the current economic climate, many people are taking a closer look at Individual Savings Accounts (ISAs). With interest rates rising, these tax-efficient accounts can seem an attractive way of maximising both savings and investments. They can also be helpful to combat the effects of inflation, which are currently eating into many people’s savings. While ISAs have many benefits, these do depend on your financial goals as well as the types of ISA you hold. In this article, we take a closer look at the different kinds of ISA that are available and the advantages they offer you.
- What is an ISA?
- What are the main types of ISA?
- How popular are ISAs?
- What are the key benefits of ISAs?
- ISA FAQs
In essence, an Individual Savings Account allows you to save or invest money without paying tax on the interest, dividends, or capital gains.
The most common ISAs are Cash and Stocks and Shares ISAs, while Lifetime ISAs are exclusively for people under 40 who are saving for their first home or for later life. Junior ISAs are for young people under 18.
Cash ISAs are essentially tax-free savings accounts. You can open some accounts with as little as £1. You are allowed to pay up to £20,000 into one ‘active’ Cash ISA in any financial year. Interest rates vary from provider to provider. Easy access accounts tend to offer lower interest rates, but you can access your money at any time. Limited access accounts generally offer a better interest rate, but you can only make withdrawals a specified number of times each year. Fixed-term ISAs offer the best rates, but you have to agree to lock away your money for an agreed length of time.
Stocks & Shares ISAs
A Stocks & Shares or Investment ISA is a tax-efficient way of investing. When you use these ISAs to invest in stocks and shares, you don’t pay income tax or capital gains tax on your profits. While this type of account can have the potential for growth, you do need to bear in mind that the value of investments will fluctuate and can go down as well as up. As a result, Stocks & Shares ISAs are generally used for longer-term investing of five to ten years plus.
You can invest up to £20,000 per financial year into a single Stocks & Shares ISA. However, you need to note that, if you also have another ISA such as a Cash ISA, your annual allowance remains at £20,000 for the two combined. For example, you could invest £10,000 in each and remain within your limit.
These products are open to people aged 40 or under, who can put money in them until the age of 50. They can be used as a cash savings account, an investment account, or can be used to hold both. You can save up to £4,000 per year and the Government will top up your savings by 25% up to a maximum of £1,000 annually. You can withdraw money from this type of account without penalty to buy your first home, or if you are aged 60+. For any other reason you will have to pay a 25% withdrawal charge. Again, any money you put into a Lifetime ISA counts towards your £20,000 annual limit (although the Government contribution does not).
Junior ISAs are for children under the age of 18. They can either be Cash ISAs or Stocks & Shares ISAs. Parents or guardians can open an account for a child under the age of 16. Any money paid into the account belongs to the child. You can pay in a maximum of £9,000 in any financial year. When the child turns 16 they can become the registered contact for the Junior ISA. At the age of 18, the account automatically becomes an adult ISA and the young person can withdraw any money that’s held in it.
Many parents and grandparents want to save for their children’s future and a growing number also consider opening a children’s pension. These cannot be accessed until the child reaches retirement age. However, we suggest you consider financial advice for young adults before deciding how to invest on their behalf.
ISAs are extremely popular. According to the latest Government statistics, there were 12 million adult accounts subscribed to in 2020/21, amounting to some £72 billion. There were also around 940,000 Junior ISAs, holding in the region of £1 billion. Compared to the previous year, Stocks & Shares ISAs grew in popularity with an extra 860,000 active accounts. While the number of Cash ISAs fell, they are still the most common type of ISA, comprising 66% of accounts.
While the number of active ISAs was lower in in 2020/21 than in the previous year, they are at their highest levels since 2015/16.
As you can see, different ISAs work in different ways. However, they do share a number of common benefits. Below are some of the key advantages.
When you put money into an ISA, any interest, dividends, or capital gains are tax-free. This is in contrast to normal savings or general investment accounts, where you have to pay income tax on gains.
ISAs give you a lot of flexibility in terms of risk. As long as you don’t go over your £20,000 annual limit, you can tailor your portfolio to include safer Cash ISAs and riskier Stocks & Shares ISAs. There is a wide range of accounts you can choose from, offering different interest rates or fees, plus accounts that allow you to dip in and out of your money as you need to.
ISAs are easy to open and accessible to almost everyone. No matter what your financial background or circumstances, you can put money into an ISA.
Any money saved within a Cash ISA is protected by the Financial Services Compensation Scheme. If the provider goes bust, you’re protected up to £85,000 per institution. For this reason, it’s often a good idea to hold ISAs with different providers if any account nears the £85,000 mark. Protection for Investment ISAs is different and more complex.
ISAs are portable. This means you can transfer your ISA from one provider to another without losing any of the tax benefits.
ISAs can be a great option for long-term savings as they offer the potential for steady growth, tax-free returns, and the security of being protected by the FSCS.
The current ISA annual allowance is £20,000, giving you the opportunity to save a significant amount of money tax-free. This may also increase in future financial years.
What happens if I put more than my annual allowance in my ISAs?
If you have a single ISA, your provider won’t allow you to do this. However, if you hold multiple ISAs, it’s possible to make this mistake. If you do, HMRC will get in touch to tell you what to do next.
Can you lose money on an ISA?
Yes. You can lose money if you invest in a Stocks & Shares ISA as the value of investments will fluctuate and may fall in value resulting in capital loss. However, if you keep your money in the account for the long term, you’re much more likely (though not guaranteed) to make a profit. Consider getting independent financial advice before investing.
Can I put money in an ISA if I live abroad?
No, you cannot put money in an ISA from the tax year after you move abroad (the only exceptions are Crown employees who work overseas, their spouses, or civil partners). You must also tell your ISA provider(s) that you have stopped being a UK resident. That said, you can keep any existing ISAs open and still get tax relief on the money and investments already held.
How many ISAs can I open a year?
You can only open one of each type of ISA in any financial year. You can also only pay into one of each type in that period. However, if you have existing ISAs that you are no longer paying into, you are allowed to keep them.
How long should I keep money in an ISA?
This depends on many different factors, including the level of your savings and your financial goals. Speak to an independent financial adviser if you would like advice.
Is ISA interest monthly?
It depends on the type of Cash ISA you hold. Some will pay interest monthly, while others will pay it annually.
ISAs can be a valuable string to your financial bow. If you are thinking about how you can maximise your financial assets to achieve your goals, our independent financial advisers can help. To find out more and have a no obligation chat, contact us on 01603 697697.
Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
Tax benefits depend on your individual circumstances and the laws concerning these can change.