How Do ISAs Work?
If you are in the fortunate position to be able to save some money for the future, you may be wondering which is the best form of investment. Will you be better off investing in stocks, putting it in some form for ISA, or just leaving it in a normal bank account for a rainy day? A lot of the time, it will depend on what your plans are for that money, but one of the more popular options is often opening an Individual Savings Account or ISA. The Government are trying to encourage all of us to save more which means profits you make with these types of investments come tax-free.
What Are ISAs?
ISAs are a special kind of savings account that allow you to accrue interest and many are offered by banks and building societies. There is a limit or allowance for the amount you can invest each year which is not subject to tax. Some ISAs are flexible, which means that you can take out and you can withdraw the money as and when you want to (though some banks have rules that affect this). Other ISA products mean you have to invest your money for a specific period of time, like 3, 5 or 10 years, before you can withdraw it again.
There are currently 4 different types of ISA on the market today:
This is the basic saving account type product and is a popular choice because it’s simple to understand. The allowance lets you put £20,000 into your account each year and there are three different choices:
- With the instant access cash ISA you can pay in and take out when you want, though some products have a limit to the amount you can withdraw at one time.
- The fixed-rate cash ISA means your money can’t be withdrawn before a certain period. In return, you get a higher fixed rate which makes this suitable for long term investors.
- Regular savings cash ISAs will give you a fixed interest rate as long as you make regular contributions each month.
Help to Buy ISA
This was introduced by the Government to help first-time buyers to get on the property market. For every £200 you put into the ISA, they add an extra £50 up to a maximum of £3,000. It’s a high-interest account, with the government contribution being applied when you withdraw the money to buy your first house. There are some rules around who can open a Help to Buy ISA, including you never having owned a property in the past. Something to note though – this will be closing to new savers in November this year,
With a Lifetime ISA, you can put £4000 into your account every year, tax-free. It can be cash savings (so you get interest), or stocks and shares investment (so you get growth). These are designed for 2 main uses: to save a deposit for your first home, and to save for retirement later in life. If you’re using it for the first, you can keep it open to use for the second later on! You do have to be between the ages of 18 and 40 if you want to open one of these accounts though, and if you have one you can keep saving into it until the day before your 50th birthday.
Stocks and Shares ISA
These are designed to produce a higher return than standard cash ISAs. Your money goes into a number of different investments with varying risk such as unit trusts and corporate bonds. You need to prepare for the possibility that your investment could go down as well as up.
Innovative Finance ISA
This allows you to invest in a newly developing area – peer to peer lending. Your money is used to lend to new businesses and individuals. It not only allows you to get interest tax free, it also lets entrepreneurs and start-ups fund their projects.
How to Find the Right ISA
According to Which?, there are over 1600 savings accounts and ISAs on the market and quite a few of these offer interest rates over 1.8%. With so much choice available, you really need to understand which type of ISA you are looking for and whether it suits your needs. The mainstream banks and building societies are not necessarily the best choices or have the best products and there are some big differences in terms of support and advice as well as interest rates.
It’s a good idea to take your time before settling on one provider over another. There are a lot of things to consider before you commit to an ISA, and sometimes you might not even know what some of the long-term implications could be yet. We recommend you do some research (like reading this article) and speak to a financial adviser (like us) before you make that leap. If you would like to know more about ISA’s, have any questions or just want some advice, we are always happy to help. Just get in touch with our team today and book your consultation.