Cast your mind back 20 years if you can. At the turn of the millennium we had Presidents Clinton and Yeltsin, Britney Spears was topping the charts and the then UK Chancellor, Gordon Brown, first introduced the ISA (Individual Savings Account) to UK savers.
It’s made a big impact since then. As the ISA celebrates its 20th birthday in April there are now an estimated 1,000 UK “ISA millionaires” who have really made the most of its saving and tax benefits, according to a recent Daily Telegraph article*.
Of course, so much can change in 20 years, including your own savings needs and goals. If you were focusing on a wedding, starting a family and buying your first home in 1999, perhaps you’re now saving towards home improvements, holiday plans, family weddings or even retirement.
What hasn’t changed is that an ISA can still help you build your savings.
Why save with an ISA?
ISAs were created with special tax incentives to encourage more of us to save. They’ve been popular thanks to a combination of simplicity, accessibility and tax efficiency. Today there’s more than £600bn in ISA accounts in the UK.
There are different types to suit different needs, but what they all have in common is that they’re tax efficient. You don’t normally pay tax on any gains you make on your ISA savings.
How much can you save into an ISA?
Your allowance is £20,000 this tax year – it has increased a lot over the years – and you can save a little, or the full amount, and even split your allowance across different types of ISA – as long as you meet certain conditions set by the Government.
Whatever your age and stage, there could be an ISA that works for you. A good starting point might be to think about what goal you’re saving towards.
Saving for the short term: A Cash ISA for rainy days and holidays
Are you saving for something soon, perhaps for a holiday or to cover any unexpected costs? A bank savings account or Cash ISA might work for you.
From age 16 you can save into a Cash ISA and get tax-free interest. Some accounts will allow you to access your money when you want without incurring charges.
It’s a good idea to shop around for the best interest rates as they have been quite low in recent years, meaning inflation is likely to eat into any growth in real terms.
Saving for the longer term: Planning a brighter future
If you’re looking a bit further forward and you can save for longer, say at least five years, investing in a Stocks and Shares (S&S) ISA could be for you.
From age 18 you can put your money in different types of investments through S&S ISAs. This gives you the potential for more growth, though they can go down as well as up in value and you could get back less than you paid in.
Junior ISAs: Starting the savings habit early
Junior ISAs – sometimes known as JISAs – let you save and invest on behalf of a child under 18. In the 2019-20 tax year you can save or invest up to £4,368 either in a Cash JISA or a S&S JISA. The money in the account belongs to the child but they can’t withdraw it until they are 18, apart from in exceptional circumstances. A bit of forward planning could turn dreams of university, learning to drive or a gap year into a reality.
The Lifetime ISA: Saving for a first home (or maybe retirement) with a bonus
The Lifetime ISA, or LISA, launched in 2017 to help people save for their first home or towards their retirement. You can open one at any age between 18 and 40.
You can pay up to £4,000 into a LISA in any tax year, as part of your £20,000 annual ISA allowance. This can be in cash or invested in a S&S ISA, and any income or growth on your LISA savings or investments is tax efficient.
What makes the LISA special is that the Government will top up what you save each year with a 25% bonus, which can really help boost your savings. But you must use your LISA savings to buy your first home or leave them untouched until age 60. If you use your money for anything else you would have to pay a 25% penalty on the value of your savings or investments.
Find out more about Lifetime ISAs on the Government’s website.
A pension is likely to be the best way to save for your retirement, especially if you can join a workplace pension where your employer pays in too. But a Lifetime ISA could be a good way to save extra towards your retirement if you’ve already maxed out your pension allowance.
You can read more about pensions in our article What’s so good about a pension?
Help to Buy: One for homebuyers
The Help to Buy ISA was launched in 2015 to help people save for their first home. While you won’t be able to open a new one after November 2019, if you have one already you can keep saving into it – or open one now while you can. They allow first-time buyers to save up to £200 a month plus an initial single payment of up to £1,200, and benefit from a 25% government bonus as long as you use the savings in your Help to Buy ISA to purchase a house. You can find out more in our article What’s an ISA, who are they for and when should I consider one?
One of the strengths of ISAs is that you can transfer between different types. For example, it may be better to have your money in a Cash ISA now as you may need access to it. But at a later date, it may make more sense to transfer to a S&S ISA to give your money more potential for growth.
There’s quite a bit to consider and if you’re unsure about your options you should speak to your adviser. There’s usually a charge for advice. If you don’t have an adviser you can find one in your area at unbiased.co.uk.
And who knows, ISAs might well be celebrating their 40th birthday in 2039.
Pensions and Stocks & Shares ISAs are investments. Their value can go down as well as up and may be worth less than was paid in. Tax and legislation may change. Your personal circumstances also have an impact on your tax treatment.
The information here is based on our understanding in April 2019 and shouldn’t be taken as financial advice.
*How to invest like an ISA millionaire, and become one in the process. Daily Telegraph, March 2019