What Are the Different Types of ISAs Available?

Ian Lewis[1]

Ian Lewis

Money Savings Advice What Are the Different Types of ISA Available?

It’s widely agreed that having an ISA is one of the best ways to save money. That’s because an ISA, or Individual Savings Account, acts as a tax-free wrapper. Any interest earned on ISA savings is paid to you tax-free, unlike in other savings accounts where you’re taxed on the interest you earn.

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How do ISAs work?

If your money isn’t protected in a tax-free wrapper, you might end up paying interest on your savings. 

Every person has a Personal Savings Allowance, allowing them to earn up to £1,000 in savings interest without paying tax. Your Personal Savings Allowance resets every year. Higher Rate taxpayers have a lower limit of £500 interest per year, whilst Additional Rate taxpayers will pay tax on any interest they earn.

Most Basic Rate taxpayers won’t earn more than £1,000 in interest every year. Those on Higher and Additional rates are more likely to reach their yearly limit. For those that do, a tax-free wrapper protects even more of their money.

ISAs also have an annual limit – the maximum you can deposit in your ISA each year. With an ISA, any money that’s already saved continues to earn interest tax-free. Each year you can add more money, up to that year’s maximum limit. Currently, this annual limit is around £20,000.

If you expect to earn a lot of interest, an ISA is a great way to reduce the tax you’ll pay. Even if you don’t expect to reach your PSA limit, an ISA might offer a higher interest rate than another savings account.

Many people like ISAs as they’re great for long-term savings and investments. An ISA can help to set money aside, so you’re less tempted to spend it.

What Are the Five Types of ISAs?

There are five different types of ISA. Choosing the right type is important, so you can take full advantage of all financial benefits.

What is a Cash ISA?

A Cash ISA is a lot like a standard savings account. You can choose an Easy Access Cash ISA or one that has a Fixed Term. A Fixed Term will usually pay a higher interest rate, but you must be prepared to lock money away for the agreed length of time. With an Easy Access Cash ISA, you can make withdrawals quickly, but you won’t earn as much interest on your savings.

What Are the Benefits of a Cash ISA?

A Cash ISA is a risk-free way to set your money aside. Your money will grow every year.

What Are the Drawbacks of a Cash ISA?

Unless you earn more interest than you’ve got covered by your annual Personal Savings Allowance, a Cash ISA won’t feel much different to any other savings account. In fact, you might find another savings account that has a higher interest rate.

What is a Stocks and Shares ISA?

With a Stocks and Shares ISA, your money is invested. Investing your money can result in better returns, but there’s also a risk that your investments won’t do well, and you’ll actually lose money over time. If you’re happy to take a bit of a risk, a Stocks and Shares ISA could allow you to receive a tax-free return on your investments.

What Are the Benefits of a Stocks and Shares ISA?

With a Stocks and Shares ISA, your money is invested, and you might enjoy better returns than with other forms of savings. No matter how well your investments do, you won’t pay tax on the returns.

What Are the Drawbacks of a Stocks and Shares ISA?

Investments are a risk. A small proportion of investors will end up losing money. In order to maximise your chance of success, you must be prepared to leave your investments alone. If you expect to need to access your savings within the next couple of years, a Stocks and Shares ISA might not be the best place to store your excess money. If you’re choosing to use a Stocks and Shares ISA, only deposit funds that you can afford to lose.

What is a Lifetime ISA?

A Lifetime ISA is also known as a LISA. These have a much smaller annual allowance than Cash ISAs and Stocks and Shares ISAs, so you’re only allowed to make deposits up to £4,000 per year. Every year, you’ll receive a 25% bonus payment. If you save the full £4,000 per year, that means that the government will add another £1,000 annually.

LISAs can only be opened by customers between 18 and 39 years old. You must save the money until your retirement or use it to buy your first home. You can’t use the money for any other purpose.

What Are the Benefits of a Lifetime ISA?

With a 25% bonus payment each year, a Lifetime ISA is a great way to save for a deposit to buy your first house. It can also be helpful if you’re saving for retirement.

What Are the Drawbacks of a Lifetime ISA?

You can only open a Lifetime ISA if you’re under 40 years old. You must be at least 18 but must open the LISA before your 40th birthday. Once you’ve put your money into the LISA, your withdrawal options are limited. You can’t withdraw the money until you’re at least 60 unless you’re using the LISA funds as a deposit to buy your first house.

What is an Innovative Finance ISA?

Though not as popular as Cash ISAs or Stocks and Shares ISAs, an Innovative Finance ISA is a valid alternative. You invest your money, and it’s loaned out through a peer-to-peer lending platform. You’ll make a profit from the interest that borrowers pay.

What Are the Benefits of an Innovative Finance ISA?

The money you invest in an Innovative Finance ISA might support individuals and businesses. Your money’s being put to good use, and you should enjoy growth in the form of interest payments when borrowers repay their loans. You’ve got a good chance of earning more interest than you would with a savings account.

What Are the Drawbacks of an Innovative Finance ISA?

As an investment product, an Innovative Finance ISA has an element of risk. With this type of ISA, the risks are very high, as there’s always a chance that borrowers will default on their payments. You might not get back all the money you’ve invested if someone stops paying back their loan.

What is a Junior ISA?

Specifically for the youngest members of society, a Junior ISA is available for customers under 18. Adults can set up a Junior ISA on behalf of a child in their care, whilst under 16s can open their own if they choose to.

Junior ISAs can come in the form of Cash ISAs or Stocks and Shares ISAs. They offer a way to save tax-free for a young person’s future. Junior ISAs have a smaller annual limit. For the 2020/21 tax year, this limit was £9,000.

A Junior ISA is locked until the named young person turns 18. After that, it converts to a standard ISA so that its owner can access it.

What Are the Benefits of a Junior ISA?

A Junior ISA provides a tax-efficient way to save for a young person’s future. The money you deposit is locked away until the account holder turns 18 when they can choose to withdraw the money or keep saving.

What Are the Drawbacks of a Junior ISA?

Before depositing money in a Junior ISA, you must be sure that you’re happy for the funds to be locked away for up to 18 years. Nobody will be able to access this money until the young person’s 18th birthday. Once the young person turns 18, the money is theirs to enjoy. You’ll get no say in how the money is spent, nor can you control access. Stocks and Shares ISAs may bring better rewards than a Junior Cash ISA, but they also come with additional risk, and you may lose the money you’ve paid in.

How Can Money Savings Advice Help You if You Are Thinking About Investing in an ISA or Stocks & Shares ISA?

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.

If you would like to speak to one of these investment specialists, then click on the below and answer the very simple questions. 

Money Savings Advice Author Ian Lewis

Ian Lewis

Ian Lewis is one of our specialist financial writers. Ian has over 15 years of financial writing experience, having worked for some of the largest financial publications in the UK covering topics from mortgages, equity release, loans and financial claims, to name a few.

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