Providing a tax-free wrapper for the savings held within it, an ISA is a popular savings product that could help you make the most of your money.
There are several different types of ISA to choose from, and each type has benefits and drawbacks. To find the right ISA, ask yourself some questions that will help you to decide what you need:
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Whilst nobody wants to lose money, some people are in a comfortable position and could afford to lose some of their savings. Being able to take a few risks with your money will provide you with more opportunities.
If you don't have a lot of spare money, and you can't afford to lose any, you'll want to choose a Cash ISA as your savings vehicle. A Cash ISA works a lot like any other standard savings account, so you'll never end up with less than you deposit though your interest rate will be fairly low.
If you have enough money to take a few risks and could cope if your investments made a loss, you might choose to invest in a Stocks and Shares ISA that could offer far better returns. Investments are more likely to help your money grow than a Cash ISA with a set interest rate, but there's also a chance that your investments won't work out, and you'll end with less money than you started with.
Assuming that you're happy to take financial risks, you could choose to invest in a Stocks and Shares ISA or offer peer-to-peer loans with an Innovative Finance ISA. Both of these options could result in a loss, though a majority of people get back a lot more than they've paid in.
If you're happy with some risk but want to play things fairly safe, you can choose to invest in Stocks and Shares but with a low-risk portfolio. Though there's still a chance you could lose money, with a safe portfolio, the risk is much lower, and you're more likely to see financial growth. Unfortunately, a safer portfolio also means that growth will be smaller.
If you're happy to take a bigger risk with your money, expect a wider swing either way. You could lose a lot more money with high-risk investments, but if they're successful, then you could come away with much more money than you first paid in.
If you specifically want to use your savings as a deposit for your first home, or if you're saving for your retirement and won't need to access your savings sooner, then you could benefit from a Lifetime ISA with 25% bonus payments. You can pay up to £4,000 per year, with the government adding up to £1,000 as an annual bonus for your savings.
A LISA is a very effective way to save, but your money can only be used to buy a property or accessed once you've turned 60. If you want to use your money for anything else or don't want to limit your options. It's best to choose a different type of ISA for your savings.
With a Flexible Cash ISA, you can access your money almost instantly. If you might need to withdraw cash for emergency expenses, this is the best option to choose. A Flexible Cash ISA is the ideal choice for people with limited spare cash, who hope to be able to save for a long time but could need to access savings very suddenly.
If you can save your money for a couple of years and won’t need to dip into your savings, a Fixed Term Cash ISA could be the best way to earn interest. Interest rates are higher for these Cash ISA products, but your money’s locked away for an agreed length of time, and there are charges for early withdrawals.
If you don’t expect to need your money for a while, you could also choose a Stocks and Shares ISA. The best way to take advantages of stock market investments is to ride the rollercoaster long-term. Your investments will go through periods of loss and times when your returns are much higher, and your best chance of success is to hold out until the initial waves have properly subsided.
Withdrawing money too early can result in losses, and this is a common problem when people panic at the first sign that they’re losing money. If you can invest your money for several years, you could get great returns from Stocks and Shares.
Most ISA products are available to everyone over 18. The exception is the Lifetime ISA or LISA. You can only open a Lifetime ISA between the ages of 18 and 39. On your 40th birthday, you’re no longer eligible for this particular product.
The Lifetime ISA has an annual limit of £4,000. If you want to pay in more than this, you’ll need a different ISA product.
You have a personal ISA Allowance of £20,000 per year. This is spread across all ISA products, so you can have multiple ISAs but can only deposit up to £20k in total.
You can combine different ISA products to maximise interest and returns. If you put £4,000 into your lifetime ISA, you’ll still have a £16k allowance remaining for other ISA products that you hold.
Many people choose to mix and match ISAs. If you’re a young person saving for your first home, you might want to use a Lifetime ISA to save up to £4,000 per year. You might also want a Cash ISA to make use of the rest of your £20k annual allowance. With this combination, you’ll be able to access the 25% annual LISA bonus whilst also enjoying tax-free interest earned on your Cash ISA savings.
Other combinations of ISAs also bring their own benefits. You might like to save some money in an accessible Cash ISA, where it’s easy to withdraw and where there’s no risk of loss, whilst also putting money in a Stocks and Shares ISA if you’re able to invest some long-term. There’s always a safety net with this combination, but your Stocks and Shares ISA could perform very well and lead to better annual returns.
You can have different types of ISA and hold several accounts at one time. As long as you don’t go over your annual ISA limits, you can mix and match to meet your needs.
Here at Money Savings Advice, we have partnered with some of the UK’s leading ISA & Stocks & Share ISA Investment companies. They have already helped thousands of people invest safely and they can do the same for you.
Choosing an independent investment company means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
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