An Individual Savings Account, or “ISA” is a simple, and tax-free strategy for modern consumers to save their money or invest. Those who are beginning to consider innovative ways to build your wealth, then ISAs might be the best place to start.
With standard savings accounts, you’ll be expected to pay taxes on the amount of interest you earn from the bank or building society you save with. However, with an ISA, your money is free from tax, so all the interest earned is yours to keep. Each tax year, starting on the 6th of April, you get a new allowance of how much money you can save in an ISA.
To help you make an informed decision about your savings, here’s a quick insight into some of the different types of ISA available.
1. A Cash (Basic) ISA
The most common form of ISA, a cash ISA is like a standard savings account, except you don’t pay any tax on the interest earned. A basic ISA shelters your savings from taxes and protects stock market investments for capital gains and income tax.
You need to be at least 16 years old to have your own ISA, or 18 if you’re planning on getting involved with investment funds and shares. Thanks to the tax advantage that comes with a cash ISA, it these saving systems should be the first place that most people look when it comes to saving money aside.
2. Flexible ISA
Previously, money withdrawn from ISA accounts has been the subject of several strict rules. For instance, money that you take out of an ISA couldn’t be entered back into the account without eating into your annual savings allowance. However, the rules have changed for flexible ISAs.
With a flexible ISA, if you take money out of your savings, you can place it back into your account within the same financial year without losing any of your allowance for tax-free savings. If you think you might need to access your money from time to time, a flexible ISA could be perfect for you.
3. Shares and Stocks ISA
Either some or all the annual allowance you have for your ISA can be invested into shares and stocks. This can be done either directly in shares of businesses, through bonds, or through investment trusts, which are funds that trade on the stock market.
If you want to try out a shares and stocks ISA, then you’ll need to choose an ISA provider that supports this option. These companies often charge a fee to help you manage your assets when you’re dealing with stocks and shares.
4. Junior ISA
As the name might suggest, a Junior ISA is designed for people under the age of 18. As much of £4,128 a year can be put into these ISAs, and they can be a great way for parents to save on the behalf of their children. When a child turns eighteen, their ISA converts into a standard cash ISA, which they take control of. From that point onward, the child decides what to do with the savings.
As is the case with basic ISAs, a junior ISA can be shared into shares and stocks, and cash, depending on your preferences. The lasting nature of these accounts can mean that investments are a better option, but it will depend on whether you’re willing to take some risk.
5. Lifetime ISA
Lifetime ISAs are one of the biggest changes to hit the savings market in a while. Aimed at people under the age of 40, this ISA allows you to save a significant amount of money each year, and get a bonus from the government as a result. The idea of a lifetime ISA is to help people save for a deposit on a property or for a retirement as an alternative to the standard pension. Anyone aged between 18 and 40 can open one of these ISAs and get their bonus payments until the age of 50.
6. Innovative Finance ISA
A relative new-comer on the ISA block, IF ISAs were introduced by the government in April 2016 and have been launched by a selection of companies such as Lending Works. IF ISAs are peer-to-peer based, meaning that essentially they act as a tax-free investment wrapper for P2P lending. Compared to other ISAs IF ISAs tend to have quite a high return.
7. Help to Buy ISA
Finally, since 2015, first-time buyers have been able to save into Help to Buy ISA funds. These funds are designed to help people looking to purchase their first home save more money in the long-term. You can save as much as £1,200 during the first month you open your account and save another £200 a month afterwards. Importantly, couples can open two separate accounts.