What kind of ISA is right for you?
How to choose the best ISA for you
Like standard savings accounts, there are several types of ISAs on the market today. This guide takes a closer look at the different types along with the questions to consider when choosing the right ISA for you.
Why do you want to save?
The first step is to think about your motivation for saving. What are your goals? Are you saving for something short term or long term? Do you want to save money every month, every year or simply as a one-off? Think about whether you’ll need regular access to your money or whether you want to lock it away. If you’re saving up for something specific like a house deposit or your retirement, you’ll be pleased to know there’s an ISA specifically designed to help.
To find out more about ISAs, get a free copy of our Beginners Guide.
How comfortable are you with risk?
There are two main types of ISA: Cash ISAs and Stocks & Shares ISAs.
Cash ISAs work much the same as a savings account, whereas Stocks & Shares ISAs invest your money in a number of different assets with the aim of growing your money over the longer term. Unlike a Cash ISA your investment in a Stocks & Shares ISA could go down as well as up, however it can offer the potential for higher returns.
So, before you choose an ISA you need to decide whether you are looking to save or invest.
If you feel OK about balancing risk with the opportunity of growth you might want to consider investing in a Stocks and Shares ISA. If you don’t like this idea, you might prefer to save in a Cash ISA instead.
Find out whether you’re a risk-taker by taking our quiz or learn more about choosing between a Cash ISA and a Stocks and Shares ISA here.
What types of ISAs are available?
Cash ISA
- What is a Cash ISA? A Cash ISA is the most basic kind of ISA in which you can deposit cash, and the interest is paid tax-free.
- Who’s it for? Savers aged 16+ who prefer lower risk saving
- How does it work? You can pay in up to £20,000 in the current 2018-19 tax year and the interest won’t be taxed.
Stocks and Shares ISA
- What is a Stocks and Shares ISA? Also known as an Investment ISA, a Stocks & Shares ISA is an investment account where any returns you get will be free from tax.
- Who’s it for? Savers over the age of 18 who are comfortable balancing risk with the opportunity for growth.
- How does it work? You can put in a maximum of £20,000 in the current tax year. Instead of simply saving your money, you’re investing it in things like stocks and shares, bonds, gilts or commercial properties, to help your savings grow over several years. But depending on how the stock market performs, the value of your investment could go down as well as up and there’s a risk you may get back less than you put in.
Innovative Finance ISA
- What is an innovative Finance ISA? This ISA lets you use the money in your ISA to invest in the peer-to-peer lending market.
- Who’s it for? Savers over 18 who are comfortable balancing peer to peer investment risk with the opportunity for better growth.
- How does it work? Peer-to-peer lending brings borrowers and lenders together. Because there are no bank fees you could get higher returns but individuals aren’t regulated in the same way as financial institutions so the risks can be higher. The IFISA contributes towards your current 2018/19 £20,000 ISA allowance.
Different types of ISAs have also been created to help you save for specific things.
Lifetime ISA – saving towards your first home or retirement
- What is a Lifetime ISA? This ISA is designed to help you save towards purchasing your first home, or to save towards your retirement, with government help.
- Who’s it for? For people aged between 18 and 39 who are saving for their first home, which costs less than £450,000, or who are saving towards their retirement from aged 60.
- How does it work? You can currently put up to £4,000 into a Lifetime ISA each year, then the government tops up your savings with 25% of what you’ve saved that year (up to a total of £1,000). You can pay into a LISA up until your 50th birthday, and unless you are using the money as a deposit for your first home, you will need to wait until you’re 60 to access your savings. You are still able to cash it in for other reasons, but in most cases this would incur a 25% government charge, applied to the whole amount of your withdrawal.
Help to Buy ISA – saving towards your first home
- What is a Help to Buy ISA? This ISA is designed to help you save for your first home and also has government help.
- Who’s it for? People over the age of 16 saving for a home.
- How does it work? You can use a Help to Buy ISA for any property, as long as it is worth less than £250,000 (£450,000 if the property is in London). The allowance works slightly differently in that you can save up to £1,200 in the first month when you open a Help to Buy ISA and up to £200 a month after that.
- Similar to the Lifetime ISA, the Government adds a 25% top up on contributions, however there are minimum and maximum top up amounts available. You’ll need to save at least £1,600 to receive the minimum top up of £400, and £12,000 for the maximum £3,000 top up.
- Help to Buy ISAs are available until December 2019, and the bonus will be applied as long as you purchase your first home by 2029.
Junior ISA – saving for your childs future
- What is a Junior ISA? This ISA is designed to help families save for their children’s future.
- Who’s it for? Children under 18 years old.
- How does it work? You can pay up to £4,260 (in the current 2018/2019 tax year) into your child’s Junior ISA. The child can take control of a Junior ISA when they turn 16, but they cannot withdraw money from the account until they are 18.
Can I switch ISA providers?
As well as opening a new ISA, it’s also possible to transfer your existing ISAs to a new provider providing they accept transfers. Never withdraw the funds and transfer them yourself doing so will count towards your ISA allowance for the new tax year, speak to your new ISA provider about this.
To find out more about ISAs, get a free copy of our Beginners Guide.
The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.