The 4 types of ISA’s explained
Key things to know about ISA’s:
ISA’s or individual savings accounts are a way in which you can save or invest, depending on your risk tolerance, tax free.
The ISA limit for the 2022/23 tax year is £20 000, this is known as your allowance which you can spend all or partly by the end of the tax year or the 5th of April 2023. You can split this allowance between the 4 different ISA’s as you wish but you may not exceed the limit.
There are 4 types of ISA’s available:
- A cash ISA
- Stocks and shares ISA
- Innovative finance ISA
- Lifetime ISA
Criteria:
- Be 16 or over for a cash ISA
- Be 18 or over for a stocks and shares or innovative finance ISA
- Be 18 or over but under 40 for a lifetime ISA
Cash ISA
The cash ISA was introduced in 1999 it is a tax free savings account, with a variety of options including but not limited to: notice, easy access and fixed rate accounts. They do however, tend to offer lower rates when compared to the other ISA’s available on the market but this is mainly because they are lower risk and as known risk and reward are correlated so the lower the risk the lower the return and vice versa, however you should only take risks with which you feel comfortable but do seek a duly licensed professional for investment/financial advice.
Keep in mind that you are only able to open a single cash ISA in a tax year, but if you feel that another provider offers a better rate than it is possible to transfer to another cash ISA or stocks and shares ISA with another provider. It is crucial that when switching, you ask your new provider to carry out the transfer because if you withdraw the money yourself you will lose your tax free status. Moreover, your provider may charge a fee when you switch to a different provider.
Stocks and shares ISA
These are riskier when compared to a Cash ISA, but they do provide better returns as compensation for the increased risk. This ISA allows you to put money into a wide variety of investments including: gilts, bonds, individual shares, investment funds and investment trusts. These type of investments usually provide better returns in the long term, as markets tend to be volatile in the short term, so make sure you only invest money with the knowledge that you won’t have access to it over several years and make sure you have sufficient short terms savings or other contingency plans in place for use in emergencies. But for any financial/investment advice contact a duly licensed professional.
Innovative finance ISA
Innovative finance ISA’s use peer to peer loans rather than cash or through raising capital through the stock market. As a result returns tend to be higher as the third party or the bank is cut out of the process. However, with the increased returns comes the increased risk and another important thing to keep in mind is that your money in an innovative finance ISA, as opposed to a cash or stocks and shares ISA, is not protected by the FSCS which is the body that protects and pays out compensation to depositors if their provider were to go bust. Furthermore, in essence you are lending your money to people when you place your money in an innovative finance ISA and there is always the risk that the borrower may default. Moreover you may also have to make a long wait when wanting to withdraw your money.
Lifetime ISA
This particular ISA was created to help those aged 18-40 save money for a deposit for their first homes or to save for retirement. For every £4 you save the government adds £1 up to a maximum of £1000, up to £4000 you are also eligible for the 25% bonus which is paid monthly. Under the age of 60 you must use the funds from this ISA to purchase a property under the value of £450 000 however, over the age of 60 you may use your funds as you wish.
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