An ISA stands for Individual Savings Account and is a tax efficient way of investing.
Every year you have the option of investing money up to a specified amount, called your ISA allowance. You are able to save this money without paying tax on your returns. The allowance limit usually changes each year, and the Chancellor tends to announce the allowance at the time of the budget. The current limit is £20,000 per tax year.
You have until the end of each tax year to invest your allowance, but it cannot be carried over from one year to the next, so you lose it if you don’t use it.
There are several different types of ISA, but we are going to focus on the main ones:
There are two cash ISA options – an instant savings account – you can invest money in and take money out whenever you like without penalties, up to your allowance. Whilst this can be an attractive option, the interest rate tends to be quite low – and may not vary greatly from a deposit account.
At the current time of writing the average is less than 1% interest per annum.
The second cash ISA is a fixed term. As the name suggests you invest money for a specified period of time, and if you need to access funds before the end of the term you may pay penalties or lose interest. Fixed term ISAs tend to have slightly better interest rates than the instant savings option, but it is still not a significant return.
Most banks and building societies offer cash ISAs.
This type of ISA sees you investing in stocks and shares, gilts, corporate bonds, property and equities. The returns can be very good, but there are no guarantees and your investment can go down as well as up. It’s also important to understand what you are investing in and to make choices to align with your attitude to risk and capacity for loss.
We are big fans of encouraging clients not to make rash decisions and keep moving investments. But equally, we do encourage clients to be aware of the markets. For example, right now commercial property is not performing as well as it has done in the past.
We often recommend clients put some of their money into investment ISAs to make the most of their tax-free allowance, as part of a balanced portfolio.
Lifetime ISA (LISA)
This particular form of ISA was designed to help people save for their first home or for their retirement.
There are very fixed rules around LISAs:
- Maximum saving of £4,000 per tax year
- Can be part of your ISA allowance, so if you invested the full £4,000 in a LISA you still have £16,000 you could use for an investment ISA
- The Government pay 25% interest per tax year on your investment, up to a maximum of £1,000
- Interest is paid monthly
- Can only pay in up to the age of 50
- It is for first time buyers only – when used for house purchase
- When withdrawing to purchase a home, it must be your main place of residence, up to a maximum value of £450,000
- Mortgages for house purchase must be a straight repayment mortgage
Generally, we don’t recommend LISAs to our clients, but do let us know if you would like to discuss this in more detail.
Junior ISA (JISA)
As the name suggests this is an investment set up for a child. It can be from any age starting when first born. The maximum allowable annual investment is currently £9,000. A child can access the funds when they reach the age of 18.
If the child already has a Child Trust Fund (CTF) they cannot have a JISA too, but the Trust Fund can be transferred to the JISA. If you are not sure about whether the child has a CTF you can check here: Find a Trust Fund.
As is always the case, you need to be aware that investments are not guaranteed, and you should be clear about this before making any financial decisions.
If you would like more advice about ISAs and whether they would be right for you, please contact us on 01344 875 310.