What Are The Different Types of ISA?
There is a common misconception that ISAs are confusing and only for 'proper adults' who know what they're doing with their money but it's really not all that. Maybe it's just the acronym that makes it seem big and scary but really, it's just another type of savings account.
If you have some money put aside that you'd like to start depositing into a savings account but don't know where to start, here are the different types of ISAs you should take a look at.
What is an ISA?
A tax-free savings account which allows you to save or invest money up to a certain amount without paying tax on your returns.
The maximum allowance for 2021-22 is £20,000 which means if you want, you can pay your whole allowance into just one account (except for a Lifetime ISA) or a combination of ISAs.
This is basically like a standard savings account except you don't pay any tax on the interest you earn, whereas with a bank or building society, you'd have to pay income tax on earnings over £1,000 (depending on your income tax band). You have to be a UK resident aged 16 or over to open a Cash ISA and you can only set one up per tax year.
Just like with normal savings accounts, Cash ISAs can be easy access (withdraw whenever you want) or fixed (limited access to your savings but a higher interest rate).
Stocks and Shares ISA
With this type of account (AKA an Investment ISA), your money is invested in assets (e.g. shares, bonds, trusts). You don’t need to pay any income or capital gains tax on the money you make and you can only pay into one Stocks and Shares ISA each tax year .
Although you have a better chance of receiving greater returns on your money than it sitting in another type of ISA, you also run the risk of losing your money as there is no guaranteed return.
I'm sure you know what a Lifetime ISA is by now but in case you don't, it's an account which allows you to deposit up to £4,000 a year and the government will add a 25% bonus to your savings. The money saved can only be used to buy your first home or for later life when you're over the age of 60.
If you know you want to buy a property at some point, I'd definitely recommend opening up a Lifetime ISA but remember, you can only claim the bonus if you are buying a property under the value of £450,000.
Help To Buy ISA
The Help To Buy ISA is similar to a Lifetime ISA except for a few conditions and the fact that from November 2019, it was closed to new accounts.
Unlike the Lifetime ISA, the maximum government bonus is £3,000 rather than £33,000 although it's still a 25% bonus but you just can't save as much in there. There is also a stricter house price threshold and as I've mentioned before, I'd thoroughly recommend moving from a Help To Buy ISA to a Lifetime ISA.
Innovative Finance ISA
An IFISA allows you to use your tax-free allowance to invest in peer to peer lending which means you can lend money to borrowers who then pay you back with interest. Whatever their interest is becomes your return which is based on how long you’re willing to lend your money for. If you open an IFISA, you will be matched with a borrower(s) which could be an individual, business or property developer.
It's riskier to set up an IFISA than some other types of ISA but the returns are more likely to be greater.
A lot of you reading this probably won't have to worry about this type of account but if you have kids, it could be an option. It allows you to save £9,000 for your children (without paying tax on any interest earned) as long as they’re under 18, live in the UK and don’t already have a Child Trust Fund. You have the option to pay into a Cash ISA, Stocks and Shares ISA or both and you can only open one of each every tax year.
For more information on the different types of ISAs, head to the Gov website.