Investment


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, 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 four types of ISA: three were introduced in 1999, the fourth, the Lifetime ISA being introduced on 6 April 2017 (Note: on 1 December 2019 the Lifetime ISA superseded the Help to Buy ISA which had been launched a couple of years previously). In his Spring Budget of 6 March 2024, chancellor Jeremy Hunt announced that a consultation paper had been published evaluating the creation of a new ISA – ‘UK ISA’ – which would enable investment in ‘UK shares or other UK-orientated investments’. The new ISA would have a subscription limit of £5,000, which would be in addition to the current £20,000 ISA allowance (tax year 2024-25).

  1. 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 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.

  2. Stocks and Shares ISAs
    Despite their name, stocks and shares ISAs are very different to cash ISAs – you’ve moved from simply putting your money into a saving scheme to actually investing it, with the risks that doing so brings. The money you invest in a 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.

  3. 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.

  4. Lifetime ISAs
    Introduced in Budget 2016, the Lifetime ISA provides a more flexible way to save for both home purchase and retirement and superseded the HTB ISA on 1 December 2019. (If you have a HTB ISA you can continue to pay into it, and benefit from it, until 30 November 2029.) You must make your first payment before reaching the age of 40, and you can deposit up to £4,000 per year until you reach the age of 50.

    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.

    As noted above, the Lifetime ISA scheme does have age caps – although anyone from 18 to 39 can open a Lifetime ISA, your eligibility ceases when you reach 50 – so it offers only those in a specific age range an additional source of government-supported saving.

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 were replaced by Lifetime ISAs on 1 December 2019, although contributions to them can continue until 30 November 2029.

Junior ISA

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.

Eligibility

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 18 or over to open any of the four ‘adult’ ISAs, ie: a cash, S&S, IF or Lifetime ISA – below that age you can open only a Junior cash ISA – and you may open a new cash, S&S and IF ISA each year should you so wish.

Tax

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 ISA

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 £20,000 per year (which remains unchanged in tax year 2024-25).

Investors can, from 6 April 2024, make deposits into multiple ISAs of the same type, ie: you can spread your £20,000 personal ISA allowance across any number of cash ISAs you hold. This is a significant step as, prior to this date, savers / investors were restricted to depositing their personal ISA allowance into just one ISA in each of the four ISA categories.

So, for example, whereas you could deposit, say £10,000 into a single cash ISA, £4,000 into a single S&S ISA, £2,000 into a single IF ISA and £4,000 into a Lifetime ISA – a total of £20,000 – as from 6 April 2024, you can invest that money into different ISAs within the same category.

If 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 admin@onefinancialsolutions.co.uk.

 
 

The value of your investment may go up as well as down and you may not get back the initial amount you invested.