27th April 2016 at 1:32pm
There are now five types of ISA to help you save in a tax-efficient way. A decade ago there were just two. Here’s what you need to know.
When it comes to saving, ISAs have really come into their own. Where and how much you can save has changed enormously over the past few years.
Remember when it was £7,000 (if not, it was 1999, and that wasn’t yesterday)? The annual limit is now £15,240, which will jump to £20,000 from April 2017.
What hasn’t changed is that any interest or gains you make when you save into an ISA are virtually tax free, which is probably why 13.5 million people in the UK now have one.*
The good news is that, as of 6 April 2016, you can take money out of your ISA and put it back in again without the amount you repay counting towards your tax-free annual allowance – as long as you do it in the same tax year.
However, not all providers allow this, so check first.
It’s also worth bearing in mind that you can take a mix and match approach on some, but not all, ISAs depending on your circumstances and eligibility, and as long as you keep within your annual limit.
The New ISA (NISA)
Introduced in July 2014, the New ISA – often called a NISA – allows you to put your money in a cash ISA or invest it in a stocks and shares ISA, or both, up to your annual ISA limit.
Investing through a stocks and shares ISA is more likely to suit those who have a medium to long-term timescale. If you’re new to investing or simply don’t have the time to choose and manage your own investments, there are lots of ready made options that are
managed for you by experts. Alternatively, you can do it yourself and build your own investment portfolio.
Investments can have more potential for growth than putting your money in cash but they can fluctuate, so you could get back less than you put in. However, typically over the long term, they will give you a better return than putting your money in cash.
HMRC published this fact sheet about the NISA which explains more.
Help to Buy ISA
A recent addition to the ISA stable, Help to Buy is a type of cash ISA available from banks and building societies. As this ISA is designed to help people get on the property ladder, only first-time buyers can get one.
Interest rates vary, with some providers offering around 3 or 4% (tax free, of course) but the real attraction is the government bonus which is added when the property is purchased. This could be worth thousands of pounds, turning savings of £12,000 into £15,000 and making saving for a property deposit that bit easier.
The newest ISA, the Lifetime ISA – or LISA as it’s known – also aims to help people get on the property ladder.
The all new Lifetime ISA
The Lifetime ISA (LISA) will be available from April 2017, giving those aged 18-40 a new option when it comes to saving for their first home, or topping-up their pension savings.
If this applies to you, you’ll be able to save up to £4,000 a year and benefit from a Government bonus of £1 on top of every £4 saved, taking your savings up to £5,000 a year.
That would leave you £16,000 from your total ISA allowance in the 2017-18 tax year to invest in other ISAs if you wished, as the bonus doesn’t count towards your allowance.
You will need to use your savings to buy your first home or take them after age 60 to keep your bonus and take the proceeds tax free. Otherwise there’s a 5% exit penalty and charges, as well as a loss of growth on the added bonuses.
Unlike the Help to Buy ISA, with the Lifetime ISA you have the option to invest your money as well as putting it into cash.
Building up a nest egg for children could go a long way to helping with their university costs or a deposit on their first home.
If you’re a parent or guardian, you can save up to £4,080 in a Junior ISA, which is a relatively new kind of tax-free savings account for the under-18s.
You can save from £10 a month – some providers have a higher limit – and stop and start payments when you want. Even saving a little over the course of 18 years can build into a decent savings pot; save more and it could be enough for a gap year or uni fees.
Money can go into cash, or be invested, or both, and belongs to the child – it’s their money, not yours. All gains are usually tax free, making it a tax-efficient way of saving for them.
The child can take the money or convert it into an adult ISA when they turn 18.
You can read more about Junior ISAs here.
Innovative finance ISA
From 6 April 2016, the new innovative finance ISA gives the option to invest using a peer-to-peer (P2P) lending company through which cash is lent to individuals or small businesses, and it can now sit within a tax-free ISA.
However, your attitude to risk would need to suit peer-to-peer lending and it’s not something everyone would be happy to consider. Plus regulatory delays mean that the number of providers offering these ISAs is likely to be very limited initially.
Did you know there’s now an inherited ISA allowance?
Many people aren’t aware that if someone has an ISA and dies, their spouse or civil partner can continue to benefit from virtually tax-free growth on those savings.
They will receive an additional ISA allowance on top of their own; it’s called an inherited ISA allowance. This can be used to allow their late spouse’s or civil partner’s ISA savings to be transferred into their own ISA.
This applies to ISA holders who have died since 3 December 2014, but there are certain strict conditions around who can inherit an ISA allowance, and when the allowance has to be used.
These include the fact that the ISA holder and the surviving spouse or civil partner must have been living together, and not legally separated, at the date of death.
There is now so much more choice for everyone when it comes to saving in a tax efficient way.
The information in this blog or any response to comments shouldn’t be regarded as financial advice and is correct as of April 2016.
The value of an investment can go up or down and may be worth less than you paid in.
* HMRC 2013-2014.