Which Type Of ISA Is Best For You?
Individual Savings Accounts were first introduced in 1999. They provided exemption from income tax and capital gains tax, and quickly became a popular place to save and invest.
Back then, it was a straightforward choice between a Cash ISA or a Stocks and Shares equivalent, but with seven different types of Individual Savings Account now available, making the right choice is much more complicated.
So how do you know which ISA is best for you, and even whether you’re eligible to apply? We take a look at the different ISA accounts available, to identify which ones might suit your needs.
Instant Access Cash ISA
A straightforward tax-free savings account offered by banks and building societies – interest rates have fallen considerably in recent years, but it’s also a risk-free way to put your money to one side.
You get instant access to your savings, and need to be at least 16 years of age to open this account.
Stocks and Shares ISA
Stocks and Shares ISAs are open to anyone aged 18 or over. The money is divided between various investment products, including company shares, government and corporate bonds, and unit trusts.
Although as an investment there’s greater risk with a Stocks and Shares ISA, you can control your exposure to it by splitting your annual allowance between this and a Cash ISA.
Parents can save for their children in a Junior ISA. It’s open to children under the age of 18, but the child can only open an account if they are aged 16 or over. The annual allowance currently stands at £4,080, but a child between the ages of 16 and 18 can also open an adult ISA, which boosts their saving capacity.
Help to Buy ISA
A fairly recent addition to the ISA family, the Help to Buy ISA was introduced in December 2015 in an attempt to boost the first-time buyer market. For every £4 saved, the government has pledged to add a £1 bonus (up to a maximum of £3,000), making it a great way to save for a deposit on a first property.
To avoid having to pay tax on a deceased partner’s ISA savings, the Chancellor introduced the facility to inherit tax-free from December 2014. From the date of a spouse’s death, the surviving partner is granted an Additional Permitted Subscription (APS) for the total amount in the account, and has three years in which to use it.
The Lifetime ISA will be introduced from 2017, and is for people between the ages of 18 and 39. A 25% bonus from the government is available, so for every £4 saved they will put in £1 up to a maximum of £1,000.
It can be used towards the purchase of a house up to the value of £450,000, otherwise you need to keep the money in the account until the age of 60 to avoid a penalty.
Innovative Finance ISA
This is seen to be a riskier choice for investors, but one that potentially brings higher returns. One of the risks is that your money won’t be protected by the Financial Services Compensation Scheme because the banks are not involved.
You place your money with peer-to-peer lending platforms, which could attract a higher rate of interest than with Cash or Stocks and Shares ISAs. At the time of writing, however, there are only eight such online lenders offering this type of ISA.
By Ann Haldon