A Short Guide to ISAs
Whether you’re getting a foot on the property ladder, or saving for retirement, ISAs or ‘Individual Savings Accounts’ can be a tax-efficient way of setting aside money for the future. As it stands in 2020, you are currently allowed to place up to £20,000 across different ISAs each tax year.
ISAs are generally offered by banks, building societies, insurers, asset managers and National Savings & Investments, with five main types to choose from, to suit different needs.
The difference between a Cash ISA and a traditional savings account is that you can earn tax-free interest on your cash. However, rates on Cash ISAs generally sit around the 1% mark, meaning that in recent years, many people are choosing to stay with traditional savings accounts.
There is a level of flexibility with this kind of ISA. When you save with a Cash ISA, you can still withdraw money from this account. However, if you decide to put money back into the ISA, then it will count towards your yearly £20,000 limit. If you have already reached your limit, you will have to wait until the following tax year.
Stocks and Shares ISAs
For those with more long-term savings goals, then Stocks and Shares ISAs offer the potential for better returns, whilst protecting your earnings from Capital Gains and Income Tax. With a Stocks and Shares ISA, you are putting your money in lots of different investments, such as individual shares, corporate bonds and government bonds, so your investments will fluctuate. This is why it is important to have a longer-term outlook when you save in this way.
When it comes to withdrawing money from a Stocks and Shares ISA, the same rule applies as with a Cash ISA – anything you put back in counts towards your limit.
Innovative Finance ISAs (IFISAs)
When you invest your yearly ISA limit in an IFISA, you are essentially lending money to businesses and borrowers. This is called Peer to Peer, or ‘P2P’ lending. In the future, the recipients of your investment will pay it back to you, along with interest. Your returns are calculated based on how long you are happy to leave your money for.
There are a few things to bear in mind when saving with an IFISA. Compared to other ISAs, there is less flexibility – withdrawing your money can take some time. Furthermore, whilst IFISAs give the potential for good returns, it’s important to remember that there is a certain amount of risk associated. Borrowers have the potential to default on loan payments and if your Innovative Finance ISA provider goes under, the Financial Services Compensation Scheme (FSCS) isn’t obliged to cover your investment, unlike other ISAs.
If you are saving for your first home or for later life, then a Lifetime ISA could help. The clue is in the name with this kind of account – when you place money in a Lifetime ISA, it’s there for life. The only circumstances you can withdraw money is when you buy your first house, you turn 60, or you are terminally ill and have less than a year to live. If you do withdraw early, then you will incur charges.
You can open a Lifetime ISA if you’re over 18 and under 40, with a yearly allowance of £4,000 each year until you turn 50. Every year, the government will top up your savings by 25%, up to a maximum of £1,000.
Junior ISAs can help to build a solid financial future for your child, whilst teaching them about savings early on. You can save on behalf of your child with a Junior ISA. Similar to a Cash ISA or Stocks and Shares ISA, you will not pay tax on interest, capital growth or dividends you receive. The Junior ISA limit currently stands at £9,000 per tax year.
Consulting a financial advisor could help you to set and achieve clear financial goals. If you have any questions, or would like to talk to one of our financial planners, please don’t hesitate to get in touch over email email@example.com or call 01992500261. Our offices will close for the Christmas period on Thursday 24 December and will re-open on Monday 4 January.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
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