5 ISAs you should know about 💸

Author

Lina Bivainyte
August 06, 2024

What is an ISA?

An ISA is an Individual Savings Account, also referred to as a ‘tax wrapper’ meaning your money is in an account that wraps around savings or investments that offers protection from tax. It is one of the most tax efficient ways to save and invest in the UK as any interest or gains within an ISA account would be completely tax free.

First introduced in 1999, it has now been around for over 25 years becoming one of the most popular personal finance tools for British people.

ISA rules:

  • Multiple ISAs: You can open and pay into more than one type of each of ISAs (for example, you can now have 2 active Cash ISAs).

  • Annual allowance: You can pay in a maximum of £20,000 in a tax year across all your ISAs combined (except for Junior ISA). LISA limit per year is capped at £4,000 and is included in the 20k allowance.

  • Transfers: You can transfer ISAs between providers and between different types of ISAs (e.g., from a Cash ISA to a Stocks & Shares ISA) without losing the tax-free status, but be aware of the rules and potential penalties.

  • Flexible ISAs: Some ISAs are flexible, allowing you to replace withdrawn money within the same tax year without affecting your annual allowance.

  • Eligibility: You must be a UK resident for tax purposes to open an ISA.

Different types of ISAs

1. Cash ISA 💸

  • Types: Includes easy access, fixed-rate, and regular savings accounts.

  • Access: Easy access accounts allow withdrawals at any time, while fixed-rate accounts may have penalties for early withdrawals.

  • Perfect for: emergency fund and any short term savings. Use this account for money you may need in the next few years.

2. Stocks & Shares ISA 📈

  • Investment Options: Can invest in stocks, shares, bonds, funds, and other investments.

  • Risk: Investments can go up and down in value, so this ISA is considered more risky. However, if you invest for long term in well diversified global index funds, the risk can be mitigated.

  • Fees: There will be fees associated with investment platforms and fund fees, so be aware when choosing.

  • Perfect for: Retirement, long term savings and growing wealth. It can be an excellent way to supplement your retirement income as you can withdraw money from an ISA tax free.

3. Lifetime ISA (LISA) 🏡

  • Age Eligibility: Available to individuals aged 18 to 39. You can pay into this account up until the age of 50.

  • Government Bonus: Receive a 25% government bonus on contributions up to £4,000 per year (maximum bonus of £1,000 per year).

  • Withdrawal Penalties: Withdrawals for purposes other than first home purchase or before age 60 incur a penalty (usually 25%).

  • Limitations: You can only use LISA for buying your first home up to the value of £450,000. It also needs to be open for a minimum of 12 months before you can receive the government bonus.

  • Perfect for: buying your first home or retirement savings. When used for retirement, you can start withdrawing at the age of 60.

4. Junior ISA (JISA) 👧

  • For Under 18s: Available for children under 18.

  • Types: Can be either a Cash JISA or a Stocks & Shares JISA.

  • Contribution Limit: Up to £9,000 per year (2023/2024 tax year) for each child. The allowance is separate from the adult ISAs.

  • Ownership: The account is in the child’s name, and they can access the funds when they turn 18.

  • Perfect for: giving your child an excellent head start in life!

5. Innovative Finance ISA (IFISA) 👨‍💻

  • Peer-to-Peer Lending: Invest in peer-to-peer loans and other alternative finance arrangements.

  • Tax-Free Returns: Interest and gains on loans are tax-free.

  • Higher Risk: These are generally higher-risk investments compared to Cash ISAs and Stocks & Shares ISAs.

What’s new for ISAs

There has been an announcement earlier this year by the government about a new British ISA to encourage more investment into the UK companies. The British ISA would have an additional £5,000 allowance on top of the usual £20,000. However, it is still not clear when it might launch.

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