Guide to ISAs

You may have heard of ISAs, but been put off by the bewildering array on offer. This video gives you the lowdown on what they are, who they’re for, how they work and how much you can invest.



Guide to ISAs, ISAs are a must-have

Whether you’re making short-term savings or long-term investments, thanks to their tax efficiency and flexibility there are different types of ISAs to choose from depending on your savings and investment objectives cash ISAs. Banks and building societies are the main providers of cash ISA accounts.

They are much like ordinary savings accounts, but with the added advantage that the interest is tax free they can accept deposits from as little as one pound up to the maximum ISA subscription which is twenty thousand pounds. You can split your ISA allowance between a cash ISA and a stocks and shares ISA.

Stocks Shares ISAs

These are ISAs that can be invested in shares, investment funds, investment trusts, ETFs and bonds. The maximum investment is 20 000 pounds for 2020/2021 which can be split between cash and stocks and shares ISAs.

Any capital gains are tax-free and there is no tax on any income or dividend. You can only open one stocks and shares ISA per tax year. Stocks and shares ISAs are worth considering for long-term investments as over the long term they produce higher returns than cash accounts. A stocks and shares isa can be opened with as little as 100 pounds or sometimes less. Both lump sum and monthly savings options are available.

Junior ISAs

Adults can open junior ISAs on behalf of children under the age of 18. Up to 9 000 pounds can be saved or invested in junior ISAs each tax year. They can hold cash or stocks and shares or a combination of both. Junior cash ISAs are available from many banks and building societies if there is at least 10 years until the money is needed it is worth considering a junior stocks and shares ISA. Any money placed in a junior ISA becomes the child’s and is locked away until the child reaches 18 then it is theirs to either spend on whatever they like or to roll into an adult ISA. You might find an ordinary children’s cash savings account a more flexible alternative

Lifetime ISA

Lifetime ISAs are designed to help the under 40s save towards the first home deposit or their pension. You’ll be able to save up to four thousand pounds a year into a lifetime ISA either as a lump sum regular savings or on an ad hoc basis. You can save in either cash or stocks and shares but if you’re planning to buy in the next five years, stick to cash and the government will add a tax-free 25% annual bonus on top at the end of the year and then the bonus is paid monthly in the following tax year. It will be calculated on your contributions bonuses will be paid until you reach the age of 50. Based on current rules the maximum bonus savers can earn £32,000 if they were to save the full annual contribution from age 18 to age 50. The money can be used either towards a first home worth under 450 000 pounds or for retirement income after the age of 60. If it is withdrawn for any other purpose or earlier than age 60 the bonuses will be forfeited and a penalty applied. However you can transfer your lifetime ISA to a different provider to get a more competitive deal.

Innovative Finance or peer-to-peer ISAs

These accounts allow you to lend money directly via an ISA to individual borrowers or companies and receive interest on your loans tax free. They are only available through peer-to-peer lending platforms which take a small fee. Up to £20,000 can be lent via these ISAs. Rates of interest are higher than on normal savings accounts because of the greater risk involved and your interest and capital aren’t guaranteed.

We recommend you steer clear of this type of ISA.