Quick Guide to ISAs
Individual Savings Accounts (ISAs) are one of the most popular ways of saving in the UK. Depite this, ISAs are often misunderstood and are praised and disparaged in equal measure by press and public alike.
There have been a number of changes to the rules surrounding ISAs, changes to how much you can save in to an ISA as well as the introduction of new types of ISA.
We have prepared a quick guide to ISAs in order to answer some frequently asked questions, to help you have informed conversations with your adviser and make better decisions when it comes to saving.
Important: This guide is designed to be an accessible summary and reflects our understanding of the ISA rules as of June 2017. Things can and do change so speak to an adviser first, do not make any decision based purely on this guide.
What is an ISA?
Good question! An ISA is a type of tax wrapper in financial services jargon. A tax wrapper is a way of investing, which carries certain tax advantages provided you stay within the rules governing the wrapper. Other examples of tax wrappers include Pensions, Onshore/Offshore Bonds and Venture Capital Trusts (VCTs).
The advantage of investing in an ISA is simple – once the money is in an ISA you won’t pay any tax on it. No Income Tax on dividends or interest payments and no Capital Gains Tax on growth.
You can pay up to £20,000 per year in to a Cash or Stocks and Shares ISA. As well as these types of ISA there are also Junior ISAs, Help to Buy ISAs and the newest addition, the Lifetime ISA:
|ISA Type||How much can I pay in over one tax year?||What can I place in this ISA?|
|Stock and Shares ISA||£20,000||Funds, Shares, Bonds|
|Lifetime ISA||£4,000||Cash or Stocks & Shares options available|
|Help to Buy||£1000 initially, then £200 per month||Cash|
|Junior ISA||£4,128||Cash or Stocks & Shares options available|
- You can mix and match what you put in to your ISAs but it cannot exceed £20,000 per year in total.
- You could put £15,000 in to a Stocks & Shares ISA for example and £5,000 in to a Cash ISA one year, then do the reverse in the following year.
- You can only take one ISA of each type in any one tax year. Opening multiple ISAs of different types should be fine but it is best to seek advice, it can get a little tricky.
Stocks & Shares ISAs
Investing using an ISA can be a great way of growing a portfolio. You will not pay Income Tax or Capital Gains Tax on income and gains made within an ISA and over time this can make a huge difference to the size your portfolio.
Right now you can pay up to £20,000 per year in to a Stocks & Shares ISA assuming you haven’t paid in to another ISA already since April 6th.
The great advantage of Stocks & Shares ISAs is the sheer range of assets you can hold inside one:
- You can hold shares in companies directly and if you have existing shares you can move them in to your Stocks & Shares ISA to save on tax.
- You can hold bonds (effectively money lent at interest to companies or governments)
- Most commonly of all, you can hold collective investments or ‘funds’. Your money is pooled with other investor’s money and a fund manager invests you money according to a brief. There are thousands of funds to choose from, some adventurous, some cautious. Some funds trade in one particular asset e.g. property or UK Corporate Bonds, some are multi-asset funds.
To invest in a Stocks & Shares ISA you will typically need to go through an ISA provider who will charge you for providing the ISA wrapper and administration, you will also need to pay fund manager’s fees and you may need to pay trading or fund switching fees if you move your investments around within the ISA. JTM and other advisers will also charge for their services. Charges can vary a lot depending on the type of investment, frequency of switching and whose services you employ.
The value of Stocks and Shares ISAs can go down as well as up and you may not get back what you invested.
Cash ISAs are basically just cash saving accounts. The difference is that you will not pay any tax on the interest, no matter how much interest you generate.
Cash ISAs have come under fire for the relatively low rates of interest the offer at present but this is no different to other cash savings accounts and may be expected to improve if interest rates increase.
Like other savings accounts, Cash ISAs can be instant access, notice accounts or pay interest after a fixed term during which the money is not accessible. Roughly speaking, the more restrictions you agree to place on your access to your savings, the better the interest rate you will get.
Lifetime ISAs can be started by anyone between the ages of 18 and 40. Once started, you can continue paying in until you are 50.
You can pay up to £4000 in to a Lifetime ISA per year.
The benefit of a Lifetime ISA is that you get a 25% bonus on your savings if you use the money to buy your first home or save it until after age 60.
The market is still quite small, particularly for cash Lifetime ISAs.
Speak to your adviser if you would like to know more.
Help to Buy ISA
Help to Buy ISAs were introduced to provide a little extra help to first time buyers. You can contribute up to £1,200 in the first month and then £200 per month thereafter. The government will add a 25% bonus when you use your Help to Buy ISA to purchase your home (the 25% bonus can’t be put towards an exchange deposit). You get the bonus once you have £1600 or more saved in the ISA.
You can open one anytime until December 2019 but you must use it for a first home purchase by 2030 or you’ll lose the bonus.
The maximum bonus is £3000 which is 25% of £12,000 so there is little point in saving more than £12,000 in your Help to Buy ISA.
At the time of writing there are some reasonable interest rates being offered for Help to Buy ISAs, over 2% in some cases.
Help to Buy ISAs are really a variant of the Cash ISAs and so you cannot take one out in the same year as the other.
If you want to save for your child or grandchild’s future one option is a Junior ISA which can be contributed to from birth to age 18 when the ISA becomes the property of the child in whose name it was opened.
N.B. Upon attaining age 18 the money saved in a Junior ISA is entirely theirs to do with as they wish!
You can save up to £4,128 per year in to a Junior ISA. Each child is entitled to only one ISA each per year.
Junior ISAs can be either Cash or Stock & Shares type investments. The decision about whether to invest in cash or funds may hinge on the age of the child and your attitude to risk.
Innovative Finance ISA
There is one further type of ISA which is being introduced to facilitate peer-to-peer lending, announced in the 2015 budget – the Innovative Finance ISA or IFISA.
The returns look attractive (very often over 4% per annum) but you should be aware of the risks of peer-to-peer lending before you invest. You are effectively taking the place of bank lending to business.
There is no protection from FSCS for Innovative Finance ISAs.
Speak to an adviser if you would like to know more.