Which ISA is right for me?

Choosing an ISA used to be fairly straightforward with the two main choices between a Cash and Stocks and Shares. Now, with a number of choices available, its important to choose the right ISA for you.

ISA’s have always been an attractive way to save tax efficiently either regularly or as a one off lump sum. However the introduction of a number of new types of ISAs means it is important to choose the right ISA for you and your circumstances.

The ISAs available

There are now six different ISAs to choose from and here we run through the different types.

Cash ISA

This is the most basic type of ISA and works the same way as an ordinary savings account. Investors need to be 16 or over. You put cash in, and you get a fixed or variable interest on the money each month or year depending on the options chosen. Any interest is tax free. You can pay in regularly, ad hoc or lump sum amounts to suit your circumstances. This is a good option for those who do not wish to take any risk with their money. It is also a good place to put money for an emergency, however interest rates are currently low. If you are investing for the longer term it may be better to look at other options. The maximum amount you can invest into a Cash ISA for this tax year 2018/19 is £20,000.

Stocks and Shares ISA

These types of ISAs allow you to invest in managed funds, trackers or shares. Investors need to be 18 or over. Normally you will open such an investment via an Investment trading platform – which helps to manage the administration. Any gains or income from these ISA investments are tax free. Because the capital can fluctuate, down as well as up, particularly in the short term, they are recommended as longer term investments; meaning 5 years or more. However, the longer term returns can be higher when compared to a Cash ISA. The maximum amount you can invest into a Stocks and Shares ISA in tax year 2018/19 is £20,000.

Junior ISA

This is an ISA designed for a child (under 18), and can be a great way for a parent or guardian to save for their child. It works in the same way to a Cash or Stocks and Shares ISA. At the age of 18, the child is then able to take over the management of the account. The ISA can form a useful lump sum which could be used towards university, a house deposit, travelling – whatever! Currently for tax year 2018/19 the amount that one can invest into a Junior ISA is £4,260.

Lifetime ISA

This is designed for longer term savings, or to buy your first home, for anyone aged over 18 and under 40 (at the time of opening). You can hold cash or stocks & shares. However, because of the long term nature of these investments, most people tend to invest in managed funds. You are able to invest £4,000 each year, until you are 50, and the government will add a 25% bonus to your ISA – up to a maximum amount of £1,000 per year. The amount invested does count towards your £20,000 ISA allowance and is not in addition to it. There are penalties for withdrawing the money out unless certain circumstances are met; such as you are buying your first home, are over 60 or are terminally ill (with less than 12 months to live). In addition, there are specific rules surrounding the type of property you can buy.

Help to Buy ISA

This is designed for first time buyers – to help them save towards buying their first home. You can only invest in cash. All interest is tax free. For every £200 you save, the government will add a bonus of £50. You are allowed to deposit £1,200 in the first month and the government will add £400 to this amount. The maximum government bonus is £3,000. The governments contributions are applied for by your solicitor when you purchase your first home. Its also important to note you cannot use these funds as your exchange deposit. Restrictions are placed on the amount you can spend on your first property – up to £250,000 outside London (£450,000 for London properties).

Innovative Finance ISA

A relative new comer to the ISA list, these allow you to invest your money into companies that offer peer to peer lending. So your deposit will be given to a company who will then lend it out to other individuals or companies or businesses. The companies in question often offer a fixed rate of return but the capital is not protected and is not covered by the financial services compensation scheme. As peer to peer lending is still relatively new, it is unclear how these investments will fair when interest rates go up or when we have a recession. So we would recommend particular caution when looking at this type of ISA.

The Inherited ISA Allowance

Not an ISA type per se, but whilst talking about all things ISA related it makes sense to mention the Inherited ISA Allowance. If you are married or in a civil partnership, from 2015, at the event of your spouse or partners death, you are able to inherit their ISA holding. In reality how this works is that the value of your spouse or partner’s ISA is calculated at death and that value can then be invested into an ISA in your name. It does not need to be the same investment, although some providers will allow in specie transfers.

So which ISA should you choose?

It really does depend on your individual circumstances and your attitude to risk and investment aims. Are you looking to deposit some money for a short time or need quick access for emergencies? Or, are you looking at investing for the longer term – your retirement or another goal? Whatever your circumstances, it is very likely that there is an ISA suitable for you. So, if you are looking at saving tax efficiently and trying and get the maximum return (for your given attitude to risk) an ISA is likely to be part of an appropriate investment solution for you.

As with all personal tax allowances, it is important to try and maximise these where possible as tax-efficient planning can produce significant positive benefits to your net returns.

 

If you have any questions regarding this article, please let me know via email Alison Lane at alane@graftonhouse.net

 

Please note this article has given a brief outline of the main features of the different types of ISAs and will not include all details. Rules on ISAs are subject to change. The value of your investments can go down as well as up and you may not get back the full amount you have invested. Past performance is not a reliable guide to future performance.

 

 

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