What’s an ISA, who are they for and when should I consider one?

Savings

MoneyPlus Features Team

21st November 2018 at 4:56pm

We’ve all heard of ISAs – after all, they’ve been around for the best part of a couple of decades in one form or another.

And yet, according to research, more than half of UK adults say they don’t understand them. A survey by Opinium for SavvyWoman in 2016 revealed many people were unsure about what you can and can’t do with an ISA – or an Individual Savings Account, to use the full name.

This lack of understanding could stop people from making the most of the potential of ISAs when it comes to aiming to build up some savings.

Whether that’s for a wedding, getting onto the property ladder, building a nest egg for the kids or laying the foundations for a tax-efficient income in retirement, here’s our quick guide to help you get the full picture.

What are ISAs?

ISAs are savings accounts, and there are several different types. What they all have in common is that they’re a tax-efficient way to save (you don’t pay tax on any gains you make), up to a certain limit each year. They are an easy way to access your money when you want to.

How much can you save into an ISA?

The ISA allowance is a very generous £20,000 each tax year, which runs from 6 April until 5 April.

You can save a little or the full amount and even split your allowance across different types, although you need to meet certain conditions.

Choose which ISA is right for you

A cash ISA

If you’re looking to save money in the short term, say for a rainy day or holiday, a cash ISA could be an option.

It’s a bit like a bank savings account in that you get interest on what you save. You get your money back with a bit of tax-free interest on top.

Do be aware that interest rates on cash ISAs are quite low and inflation – the increase in prices for goods and services – is likely to eat into that.

Time to invest: a stocks and shares ISA

If it’s the potential for growth you’re interested in and you can save for longer, say at least five years, then you might want to consider investing your money in a stocks and shares ISA.

This type of ISA lets you put your money in different types of investments, usually through investment funds, but you can also invest direct into things like shares and bonds.

But investments can fluctuate and go down as well as up in value, so you could get back less than you paid in. That’s one of the main differences between saving and investing. Read more on what this means in our article.

If you like the sound of giving your money the potential to grow but are new to investing, many stocks and shares ISAs offer ready-made investment options. Or, if investing is something you’re comfortable with, you can pick your own.

Try our ISA calculator to give you an idea how much an ISA could be worth in the future.

One for the kids: a Junior ISA (JISA)

If you’re a parent or guardian of a child and aiming to build up a nest egg for them, perhaps to give them a helping hand with university fees, a property deposit or enough to fund a gap year, a Junior ISA could be an option.

You can save up to £4,260 per child into a Junior ISA, which goes up to £4,368 from April 2019.

You have the choice of a cash JISA, or a stocks and shares one where you invest your money. You could split the allowance across both if you prefer.

One thing to bear in mind is that with a stocks and shares JISA where you’re investing your money, it can go down as well as up in value, and you could get back less than you paid in.

Another thing to keep in mind is that any money you save becomes the child’s and they can spend it how they want from the age of 18.

If you were to use the full allowance every year, that could turn into quite a sum of money.

Alternatively, you could save into your own ISA for them instead, so that you keep control.

More on Junior ISAs:To find out more, visit our Junior ISA page or the Money Advice Service website.

Getting on the property ladder: Help to Buy ISA

Getting on the property ladder is an exciting milestone for many people but you usually need to put down a sizeable deposit, meaning you’ll need to save thousands of pounds.

That’s where a Help to Buy ISA can help.
It’s a type of Cash ISA that some banks and building societies offer first-time home buyers and it usually comes with interest rates of around 2-3%.

You can open up this type of ISA with up to £1,200 (if you have it) and save up to £200 a month.

But the real attraction is the government bonus you get on top of this when you’ve bought your property which will boost your savings by 25%.

Think of it as free money to help you with taking that first step.

The maximum top-up could be worth up to £3,000, turning savings of £12,000 into £15,000, making saving for your first home that bit easier.

The government’s Help to Buy website goes into more detail about who’s eligible.

More help to buy: a Lifetime ISA

A newer addition to the ISA family, this is an option if you’re aged 18-40 and trying to save for your first home or want to top up your pension savings. Anything you don’t use to get a foothold on the property ladder, you can spend when you turn 60.

Save up to £4,000 a year and get a government bonus of £1 on top of every £4 you save, taking your total up to a maximum of £5,000 a year. That’s a 25% bonus.

But there are certain things you need to be aware of to make the most of a Lifetime ISA.

The government bonus is paid every year until you hit age 50 but to keep your bonus and take your money out penalty free, you’ll need to use your savings to buy your first home, or wait until you’re at least age 60.

There are cash and stocks and shares options. If you go down the stocks and shares route, your money is invested, so it can go down as well as up in value and it may be worth less than you paid in. Find out more about Lifetime ISAs on the government’s website.

There’s a lot to consider when it comes to choosing where to put your money. If you’re considering this, you’ve still got a few months left until the new tax year starts in April 2019.

We hope we’ve cleared up some of the ISA puzzles for you.

The information here is based on our understanding in November 2018 and should not be regarded as financial advice. Your own circumstances will have an impact on tax, and tax and legislation may change.