If you’ve ever considered saving money for the future - whether that be for a house, wedding or a car - you’ve probably heard the term ‘ISA’. ISA stands for ‘Individual Savings Account’ and is exactly what it says on the tin – a financial product designed to help individuals save.
How do ISAs work?
ISAs are like savings accounts but come with additional benefits like tax allowances and bonuses, depending on the type of ISA you open. For example, Lifetime ISAs (LISAs) give individuals a 25% bonus on contributions made up to the value of £1,000, but they can only be used towards a first house or retirement.
The main benefit of an ISA product is the annual tax allowance you receive when saving. Any interest or gains made in an ISA is not subject to taxation, meaning you get to keep any money you make as long as you stay within your allowance.
What's the ISA allowance?
Each individual has an ISA allowance of £20,000 in the 2019/20 tax year. This means between your ISAs, you can’t deposit more than £20,000 in a tax year. However, you are able to split your allowance between different types of ISA. This means you could deposit half in a Cash ISA and half in a Stocks & Shares ISA, but you couldn’t split the money between two Stocks & Shares ISAs.
For a Junior ISA (JISA), the allowance is lower at £4,368. This does not affect your personal ISA allowance of £20,000 as the product is held against a child’s name.
How many ISAs can you have?
You can open and contribute to more than one type of ISA in each tax year, but you’re not able to contribute to another ISA of the same type (confusing, we know). So, if you contributed to a cash ISA in 2019/20, you couldn’t contribute to another until 2020/21 tax year, but you could contribute to a stocks & shares ISA in 2019/20.
JISAs are held against a child’s name which means you can also contribute to that without affecting your allowance, but that money is only accessible by the child once they reach 18.
What are the different types of ISA?
Cash ISAs are often offered by bank and building societies. They are similar to normal savings accounts and offer a fixed rate of return on your contributions.
Cash ISAs can be good for short-term savings as they come at no risk. However, be careful of which type of Cash ISA you choose as some may have charges for withdrawing. For Instant Access ISAs, there should be no penalty, however for Fixed Rate ISAs you may face some penalty if you withdraw before the set period.
Stocks & Shares ISA
With a Stocks & Shares ISA your money is invested in company shares, investment funds and sometimes cash. They are riskier than Cash ISAs as you could get back less than you invested, but they do have the potential to have higher returns.
Stocks & Shares ISA are more suited to long term goals as you’re able to balance out the ups and downs of the stock market over time. If you invest with OpenMoney, you’d be investing in a Stocks & Shares ISA.
Lifetime ISA (LISA)
Lifetime ISAs were introduced in April 2017 so are relatively new in the world of ISAs. Lifetime ISAs are a little different to cash and stocks ISAs as they’re designed to help first time home buyers and those wishing to save for retirement.
A LISA can be either a cash or stocks and shares ISA and can be opened by people ages 18 to 40. The limit for a LISA is lower at £4,000 but the government add a 25% bonus to any contributions up to the value of £1,000.
The bonus must be used against your first home or can only be accessed when you’re 60. If you use the money for anything else, you will be charged and are likely to get less money back than you put in.
Junior ISA (JISA)
Junior ISAs are designed to let parents invest for a child below the age of 18. The limit is £4,368 per child for the current tax year.
As with a LISA, a JISA can be cash or stocks and shares, with any interest paid tax-free.
JISAs are a great way to save long-term for your children, but parents and adults should be aware that the account belongs to the child and can only be accessed by them at the age of 18.
It’s important that you understand the impact an ISA will have on your financial situation before you open one.
If you’re interested in opening a Stocks & Shares ISA, you can take the OpenMoney financial questionnaire to find out if you’re currently in a healthy position to invest.To take the quiz, click Get Started.