What are ISAs?
If you’re thinking about saving or investing, it can be difficult to decide on the best place to put your money. There are hundreds of different accounts on offer from banks, building societies and investment companies. So how do you make your choice? For many people, taking out an ISA (Individual Savings Account) can be a good place to begin.
What are ISAs?
An ISA is a tax-efficient way to save or invest. The advantage of these types of account is that you don’t pay tax on the interest you earn, or the increase in value of your investments (no Capital Gains Tax to pay) and some deliver a government bonus. There are now several different types of ISA available, designed by the government to encourage people over 16 to save or invest for their or their children’s future.
What types are there?
The basic types of ISA are:
- Cash ISAs
- Help to Buy ISAs
- Innovative Finance ISAs
- Lifetime ISAs
- Stocks and Shares ISAs
- Junior ISAs
With a Cash ISA you don’t need to pay tax on the interest you earn on your cash.
Help to Buy ISAs are designed for first-time house buyers and are a type of cash ISA. When the money saved is used to complete a house purchase, the government adds a 25% bonus (up to a maximum bonus of £3,000).You can no longer open a new Help to Buy ISA, but if you already have one, you can continue to save into the account.
Innovative Finance ISAs involve cash used for peer-to-peer lending, and mean that any interest you earn from lending your money to other people or companies is not taxed.
With a Lifetime ISA (LISA) you are able to hold your money in cash or invest in stocks and shares. LISAs are designed for those aged 18 to 40 wanting to save for their first home or retirement, with the added attraction that they can save until they are 50 if they wish to and can leave the account open until age 60. People under the age of 40 are able to contribute up to £4,000 in each tax year. Government bonuses apply up to age 50.
If you choose a Stocks and Shares ISA, there is no Capital Gains Tax and no tax on income. ISA dividends have no impact on the dividend allowance.
Junior ISAs are a tax-efficient way to build up savings for a child and can be opened for any child under 18 living in the UK. The money can be held in cash and/or invested in stocks and shares.
How much can I save in an ISA?
The ISA allowance is a generous £20,000 for the 2019/20 tax year. You can put all the £20,000 into a Cash ISA, or invest the whole amount into a Stocks and Shares ISA or Innovative Finance ISA. You can also mix and match, putting some into cash, some into stocks and shares and the rest into innovative finance if you wish. However, the combined amount can’t exceed your annual ISA savings allowance of £20,000 for the 2019/20 tax year.
With a Help to Buy ISA savers aged 16 or opened their ISA with an initial deposit of £1,200, which qualified for a government bonus of £300. Savers can then contribute a maximum of £200 each month, with the government contributing a bonus of up to £50 on top. In order to claim the maximum bonus of £3,000, they need to save £12,000. The Help to Buy ISA bonus can only be used as part of the final completion monies; it cannot form part of the deposit paid at exchange of contracts. You can no longer open a new Help to Buy ISA, but if you already have one, you can continue to save into the account.
With a Lifetime ISA, if you are aged between 18 and 40, you will be able to save up to £4,000 each year. The government will then provide a 25% bonus on these contributions at the end of the tax year. This means that people who save the maximum each year will receive a £1,000 bonus each year from the government. Savers will be able to make Lifetime ISA contributions and receive
a bonus from the age of 18 up to the age of 50. Savers need to be aware of the risks associated with a LISA, early withdrawal charges, restrictions and accessibility. Commencement needs to be between 18 and 40, contributions can continue to 50, with access on first home purchase or from 60, without penalty.
In the 2019/20 tax year, £4,368 can be saved in a Junior ISA.
We can help you make the right choice of ISA based on your age, the length of time you want to save for and your plans for the future. We can save you time and make recommendations that are right for your personal financial circumstances.
Should I opt for cash or shares?
Cash is solid and reliable, and with a Cash ISA you are guaranteed to get back all the money you have put in – but with interest rates continuing to remain low, there is a risk that inflation will erode the value of the money saved over time.
If you are able to lock your money away for a reasonable amount of time – a minimum of five years for example – it is often better to invest in stocks and shares which historically have offered a better return, although this is dependent on your attitude to risk and your circumstances. Unlike cash savings, money invested in stocks and shares rises and falls in line with what is happening in financial markets. So, the value of your investment can go up and down.
Given that you can put your money into both cash and stocks and shares in an ISA, people often find this a tricky decision to make. This is where we can offer practical help and guidance based on your attitude to risk, and the length of time you have to save or invest.
Can I have more than one ISA?
You can split your savings across multiple ISAs to have a combination of Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISA. However, you can’t exceed the combined allowance of £20,000. You can continue to hold ISAs set up in previous years.
Do I lose the tax benefits if I take money out?
ISAs can be flexible, which means that if the account terms allow, you can take cash out and put it back during the same tax year without reducing your current year’s allowance and without losing the tax benefits.
Do I include my ISA on my tax return?
No, there is no requirement to do this under current tax rules. You don’t need to declare income and capital gains from ISA savings or investments on your tax return.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.