Tell me about ISAs….

What is an ISA?

ISA stands for Individual savings account. What actually is it then? It’s just a special pot that has specific rules that apply to it. They are generally used to save for longer term things- like buying a house, or savings for children’s university eduction- but they can be used to save for anything. There is a total ISA contribution limit of £20,000 per tax year, & the LISA has a seperate limit of £4,000. So, if you wanted to have £4,000 in a LISA, you could only put £16,000 into a cash ISA in the same year.

Hold on- there are tons of different versions/names?

I’m afraid so, but it’s really not as complicated as it sounds- there are 5 main types:

Cash ISA– very much like a bank savings account, it will usually pay a fixed rate of interest per year, but current interest rates are very low.

Pros: Easy access, no risk of losing the money (under the FSCS limit of £85k per person, per bank). Useful if you need the money in a hurry

Cons: Rates are very very low, would actually lose money compared to inflation.

Stocks & Shares ISA– This is basically a wrapper that you can hold both stocks & shares within- and even hold cash as well if you wanted to (though, I’m not sure why you would when a cash ISA exists)

Pros: Can invest in the stock market, or buy index funds etc

Cons: Stock market can go up and down- shouldn’t be used for saving for any time period below 5 years (unless you are happy with the risk)

Cash LISA/Stocks & Shares LISA– The LISA can be held as either cash, or S&S- depending on the purpose that you are going to use it for.

Pros: 25% Bonus from the government for everything that you put in each tax year. New allowance/bonus every year.

Cons: Costs 25% of the total amount if you withdraw before retirement or buying a house. Maximum of £4000 input per year, so not great if you want to save more than this. Needs to be open before you are 40, can only input until you are 50. Can’t be withdrawn from until you are 60 (currently)

Innovative Finance ISA’s (IFISAs)- This enables you to invest in slightly “off piste” investment options like peer to peer finance etc, and keep the interest tax free

Pros: Can keep interest/returns from P2P (and other IFISA offered products) tax free, year on year.

Cons: Lots of the newer IFISA products haven’t been properly tested in adverse market conditions. P2P has had a lot of bad press recently. It maybe very difficult to get your money out (quickly or at all)

What’s the point of an ISA?

Well, basically, there is no tax to pay on the interest/return on anything that if put into an ISA. So if you invested £10,000 in amazon shares, and they did amazingly well over the next 10 years, and tripled in value, you wouldn’t have to pay anything on this capital gain. Even better than that, you don’t even have to do a self assessment, as it was all held within an ISA.

What if I have more than £20,000 to put in an ISA?

The limit that you can input per year is £20,000, but come the new tax year (6th April)- you get a brand new allowance. So, if you had £40,000- then within a year you could have it all in an ISA (£20,000 before the April 6th, and then £20,000 after April 6th). If you have a partner- they get their own ISA allowance each year as well, making a couple able to input £40,000 a year into an ISA- quite an amount to make tax free every year!

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