Individual Savings Accounts (ISAs)
Almost always referred to by its acronym, an ‘ISA’ is a retail saving or investment scheme allowing UK residents to save or invest their money without incurring a tax liability. In its basic ‘cash’ form, an ISA could be considered to be one step above a bank’s savings account – although interest rates are similar, you don’t pay tax on the interest you earn. ‘Stocks and shares’ and ‘innovative finance’ ISAs move into investment territory which means, of course, that the value of your investment could go up or down – but you won’t have to pay interest on any profits or dividends.
So, if you’ve spare cash, putting it into an ISA is better than leaving it in a deposit or savings account (or, with interest rates currently, in November 2017, being only slightly better than rock bottom, stuffing it under the mattress) and much simpler and more flexible than investing it via a broker.
ISAs were introduced in 1999 and replaced Personal Equity Plans (‘PEPs’) and Tax-Exempt Special Savings Accounts (‘TESSAs’) in an effort to simplify personal saving schemes and encourage people to save.
There are some restrictions dictating who can open them, the amount of money that can be invested in any given tax year and how funds are transferred but, generally, ISAs offer a simple, tax-free, method of saving or investing.
Types of ISA
There are five types of ISA; three were introduced in 1999, a fourth, the Help to Buy ISA, was launched on 1 December 2015, and the fifth, the Lifetime ISA, came into being on 6 April 2017.
- Cash ISAs
This is a cash saving scheme and is usually offered by banks and building societies rather than investment firms. In its basic form, an instant access cash ISA could be considered to be one step above a basic savings account as, although interest rates and terms are similar, any interest you earn is tax free. That may not be a huge benefit when interest rates are low but if, and when, they are high, the amount of tax you pay could start to become ‘significant’.
As with savings accounts, providers usually offer a range of cash ISAs with features such as fixed or variable interest rates, instant or flexible access, minimum account balances and differing lengths of term which result in a spread of interest rates.
- Help to Buy ISA
A variation of the cash ISA, the Help to Buy ISA (‘HTB ISA’) was specifically designed to help first-time home buyers: the incentive to use it being a 25% government-funded bonus if the ISA was used to pay the deposit on a first home purchase.
HTB ISAs will be replaced by the new Lifetime ISA (see below) from 1 December 2019, although contributions to HTB ISAs will continue until 30 November 2029.
- Stocks and Shares ISAs
Despite their name, stocks and shares ISAs are very different to cash ISAs – it’s not saving money, it’s investing it. The money you put into your S&S ISA is invested in ‘qualifying investments’ such as corporate and government bonds, stocks and shares and unit trust and investment funds. As with cash ISAs, there’s no tax liability – you don’t pay capital gains tax, you don’t pay interest earned on bonds and there’s no tax on any dividends you may receive.
You can buy S&S ISAs from banks and investments houses, the least expensive route being online through a specialist website, often called a ‘platform’: you’ll have to choose both a provider and the investments you want to invest in.
Potentially, S&S ISAs offer a better return than cash ISAs but, as with any form of investment, the value of what you deposit – your investment – can go up or down which means you risk losing all or some of your money.
- Innovative Finance ISAs
Sometimes known as ‘peer-to-peer lending investments’, Innovative Finance ISAs (‘IFISAs’) were launched in April 2016 and are used to lend money through the growing ‘Peer-to-Peer’ (‘P2P’) lending market which is accessible via FCA-regulated websites known as ‘peer-to-peer lending platforms’.
The interest rates offered by IFISA providers are often double what you’d expect to receive with a cash ISA – the premise being that peer-to-peer lending cuts out the middleman, the bank, in the lending process and this reduces the cost – however, the higher rate does underline the fact that P2P loans have a higher risk profile.
- Lifetime ISAs
Introduced in Budget 2016, the Lifetime ISA is seen as providing a more flexible way to save for both home purchase and retirement. Consequently, Lifetime ISAs will supersede the HTB ISA from 1 December 2019 although. if you have one, you can continue to pay into it, and benefit from it, until 30 November 2029.
As with the HTB ISA, the government pays a 25% tax-free bonus into the account but, with the scheme now re-designed to cover both house buying and retirement, the most noticeable difference is that it’s paid on a monthly basis rather than when the account is used as a deposit for a house.
The scheme’s eligibility criteria has a maximum-age cap – anyone from 18 to 39 can open a Lifetime ISA so it offers only those in that particular age range an additional source of government-supported saving.
This is a tax-free savings or investment wrapper aimed at encouraging parents to save for their children’s future. The money saved, or invested, is effectively locked away until the child’s 18th birthday when it converts to being a standard cash or S&S ISA and allows the child to access it themselves.
Any child under 18 can have a Junior ISA but how it’s opened depends on when they were born as, if they were born between 1 September 2002 and 2 January 2011, they would automatically hold a Child Trust Fund and this would need to be converted into a Junior ISA.
Both Junior cash and S&S ISAs have an annual savings limit and convert to being an ‘adult’ ISA when the holder reaches age 18. However, as the minimum age for opening a cash ISA is 16, from that age it’s possible to have both a Junior cash ISA and an ‘adult’ cash ISA.
Any resident of the UK can open an ISA. You have to have a National Insurance number and, as ISAs are ‘personal’ saving schemes, you can’t open an ISA either with, or on behalf of, someone else.
You must be aged 16 or over to open a cash ISA, and aged 18 or over to open a S&S or IFISA – below those ages you can open only a Junior ISA. You can open a HTB ISA from age 16 unless you already have a cash ISA, and HTB ISAs are only available to those who are not homeowners – the intention of the HTB ISA is to help first-time buyers – however, anyone between 18 and 39 can open a Lifetime ISA.
You are entitled to open a new cash, S&S and IFISA each year which means you could have multiple ISAs – but, despite this, you can only pay your personal ISA allowance into one of each type each year (see Investing into an ISA, below).
The basic principle of an ISA is to provide a tax-free method of saving, even if that involves investing in the markets. Money saved in a cash ISA is exempt from both income tax and capital gains tax. If you’ve invested in either a S&S ISA or IF ISA you don’t pay capital gains tax, you don’t pay interest earned on corporate bonds and any dividends you receive are tax-free.
In fact, the ISA system is so ‘tax free’ that if you have to submit an annual tax return to HMRC you don’t need to declare any interest, income or capital gain that’s resulted from your ISAs.
Investing into an IFISA
Not surprisingly, there are limits to how much money you can save or invest in your ISA, or ISAs, and this is controlled by a ‘personal ISA allowance’ of £20,000pa (tax year 2018-2019: it will remain at this level for tax year 2019-2020).
This is a total figure, not a ‘figure per ISA’, which means you have to decide whether you’re going to put it all in one ISA or spread it across those you may have. If you have a HTB ISA, you can save a maximum of £4,000 per year which means you’ll have £16,000 of your personal allowance to deposit into any other ISAs you may hold.
So, if do you have money to save, putting it into a cash ISA is better than leaving it in a deposit or savings account and if you’re a first-time buyer, either a HTB or Lifetime ISA will help towards saving for a deposit. If you’re attracted by a potential higher return, investing it in an S&S or IFISA is a simple way of entering the investment world but, remember, the value of your investment may go down as well as up.
How can One Financial Solutions help you?
“It’s not about timing the market, it’s time IN the market that counts.” is another of Warren Buffet’s legendary quotes. Apart from re-emphasising that investment should be treated as a long-term venture, it also underlines that ‘being in the market’ helps build the all-important store of knowledge and experience you need to be successful – something you can’t pick-up quickly.
One Financial Solutions is here to help you. Our advisers are experts who live and breathe investment – it’s how they make their living. They’ll take time to talk to you about your financial objectives, the level of risk you’re prepared to accept and any investment preferences you may have. They’ll provide expert guidance and, once you’re happy to go ahead, they’ll put everything in place and keep you updated for the duration of your investment.
So, if you’re looking for help with any aspect of investment, please call us on 020 3714 9565 or ask us to call you by sending an email to firstname.lastname@example.org.