Are you looking for the perfect ISA? Here are your options.
The start of a new tax year means you’ve got a fresh individual savings account (ISA) allowance to use up, letting you stash away up to £20,000 entirely tax-free in the next 12 months. But how can you find the one that’s right for you? We speak to Tim Bennett, head of education at Killik & Co, to take a closer look at your three main options.
What are Standard ISAs?
These are your first choice, which come as either cash or investment versions. With the former, you save your money in a cash-based account at a pre-agreed interest rate, while with the latter, you’re free to invest in a wide range of shares, bonds or trusts, and still benefit from a tax-free wrapper. This year, you can save up to £20,000 in a cash or investment ISA (or can split it between the two) either as a lump sum or in regular contributions, depending on the account you choose.
“For savers of almost every age, standard ISAs are something of a no-brainer,” says Tim. “That’s due to their flexibility and the tax shelter they provide.”
Whether you opt for a cash or investment version is entirely down to your preferences and appetite for risk. Cash ISAs offer guaranteed returns, but those returns are known for being poor. You can withdraw money from standard ISAs, though you may be charged an interest penalty if you’re locked into a fixed-rate cash ISA, but this depends on your bank. Conversely, the beauty of investment ISAs is your returns aren’t based on a set interest rate, but rather the performance of the funds you’ve invested in. Just bear in mind the volatility of the stock market means you may end up with less than you put in.
Why you should set up a junior ISA
This ISA lets parents open an account for their child and anyone can then contribute up to £9,000 per tax year, with the same tax-free benefits and account options (cash and investment) as their adult counterparts.
“A huge range of investments can be held within the wrapper, with the opportunity to grow tax-free until they turn 18,” says Tim. “At that point, the money can be withdrawn or the income and capital gains tax protections can be maintained via an automatic rollover into a standard adult ISA.
“Given how powerful the impact of compound growth on the underlying investments could be, if a family can afford to pay into one, a Junior ISA makes a lot of sense.”
The pros and cons of Lifetime ISAs
These offer a highly tax-efficient way to save for a first home or retirement, with an annual investment limit of £4,000, plus a lucrative government bonus of 25% on top of everything you save. This means you can only put £4,000 into a LISA, but outside of this account you have a £20,000 annual limit, so you can spread an additional £16,000 across different ISAs for the best returns. Anyone between the ages of 18 and 39 can open a lifetime ISA (LISA) and can contribute until they’re 50.
However, withdrawing funds for any purpose other than a first home or retirement (before the age of 60) will result in a hefty penalty charge of 25%. As such, “LISAs will suit some savers,” says Tim, “but they’re not for everyone.”
Discover innovative finance ISAs
These accounts are the least well-known member of the ISA family, says Tim, with innovative finance ISAs allowing investors to take a greater level of risk thanks to the ability to access peer-to-peer lending (P2P) and other alternative asset providers. P2P is a way to lend money to individuals or businesses and receive interest, and the intended outcome is that you get the original investment back plus the interest when the loan is repaid. Yet this level of risk is also its downfall.
“P2P is increasingly coming under the spotlight of the regulator and some of the biggest names in the space have either restricted access to retail investors or exited the market altogether,” Tim explains. “My view? Approach with care.”