Individual Savings Accounts (ISA)

An ISA is an Individual Savings Account that allows you to pay into a cash or investment account, and any growth within the account is entirely tax free.

ISA’s are available from a number of different providers including: banks, building societies, insurance companies and asset managers.

There are also a number of different types of ISA that are now available.  These include:

They all share the same benefit of being completely tax free, but offer different additional features to suit various savings goals.

Cash ISA

As the name suggests, this allows you to deposit cash savings into the account in the same manner as a regular savings account.  The difference being that any interest you earn on the cash within the ISA is tax free, whereas interest within a regular savings account is taxable.  

However, there is a cap on how much you can deposit into a cash ISA each tax year, currently this limit is £20,000.  You can only open and contribute to one cash ISA each tax year. 

Stocks and Shares ISA

A stocks and shares ISA functions in the same way as the cash ISA, in that it offers all the same tax relief.  This means that any investment growth is free of capital gains tax and any income from the investments is also tax free.

The limit on contributions to the investments is still limited to £20,000 each tax year.

As for the investments themselves, you can either pick them yourself or you can get advice and support from a financial adviser.

A financial adviser can not only help with advising on which investments may be most appropriate for you, they can also carry out the purchase of the investments for your ISA.  It’s also fairly common that the adviser will monitor your stocks and shares ISA so that they can review it’s performance with you.

Our experts would encourage anyone considering saving for longer terms goals, of five years or more, to at least consider a stocks and shares ISA.  This is because fixed returns on cash ISAs are currently relatively low compared with the returns on investments over the long term. However, to work out what is best for your specific circumstances you can get in touch with one of our advisers. 

Help to Buy ISA

This is another form of cash ISA, however this one is backed by the government and its aim is to help first time buyers get on the property ladder.

The help to buy ISA’s most unique feature is that it offers first time buyers a bonus on their savings of 25% when the funds are being used to purchase their first home.  The 25% bonus is capped at £3,000, meaning to gain this maximum benefit you would need £12,000 of savings in the account. There is also a restriction on contributions. When you first open the account you can deposit £1,200 but from there on you are restricted to a maximum monthly contribution of £200. 

A help to buy ISA can be used in conjunction with the government help to buy scheme.  If you require any help with ISAs, the help to buy scheme or advice on mortgages, please don’t hesitate to get in touch.

This specific “help to buy” ISA closed in November 2019, however the Life Time ISA continues and provides the same benefits and more. 

Lifetime ISA

The lifetime ISA works in a very similar way to the previous “Help to Buy ISA” in that savings can be built up and the government will grant you a bonus on those savings.

The key difference is that as well as the bonus being applied for first time house purchases, it can also be applied in retirement and you can withdraw the funds from age 60.  

The government pays a 25% bonus on whatever you save up to a maximum of £1,000 each year. The bonus is paid into your lifetime ISA account each month. If you use the money for retirement, you can only pay into the account until you’re 50-years-old, and must wait until you’re 60 to withdraw it.

Many investors taking out a lifetime ISA may be looking at it as an additional vehicle to contribute towards their pension provisions.  With this in mind the Lifetime ISA also provides you with the option to invest in stocks and shares instead of just leaving your funds in cash.  The historical data always shows that investing in stocks and shares will beat fixed interest over the long term.  The key word being the “long term”, as investments are volatile and need time to provide a return. As a rule of thumb, any savings you are considering putting aside for at least 5 years, you should at least consider the option of investing in stocks and shares.    

Obviously selecting the right investments to have inside your ISA is a complex task and we’d recommend that you speak to a financial advisor, to help talk you through the options and establish what strategy would best suit your needs.