Although one of the most popular savings accounts in the UK, ISAs can seem more complicated than they really are. In recent years, the government has created a wider range of ISA types, leaving some consumers confused at what’s best suited to them.
In this article, we answer some common questions, explain the rules and regulations behind each ISA, the costs and benefits of keeping your money inside one and the difference between Cash and Stocks & Shares ISAs.
Can I Invest in an ISA?
Any UK resident can invest in an ISA from:
- Age 16 for Cash ISAs; or
- Age 18 for Stocks & Shares ISAs.
What Tax Do I Pay on My ISA?
The main reason to save or invest your money in an ISA is the favourable tax treatment you get. Funds held inside an ISA account are free from Capital Gains and Income Tax, plus there’s no tax to pay when you withdraw from your ISA.
With these tax incentives in place, there’s no need to declare an ISA on your tax return.
What Is My ISA Allowance?
It’s important to note that there is a limit on how much you can invest into ISAs within each tax year. For the current tax year, the limit is £15,240 and this will rise to £20,000 from 6 April 2017.
Your allowance of £15,240 does not roll onto the next tax year. So, if you invest £10,000 into an ISA before 5th April, the remaining £5,240 of your allowance for that year will not be added to the following year’s allowance.
You can split your allowance between Cash and Stocks & Shares ISAs as best suits you, as long as the combined total contribution doesn’t exceed £15,240.
However, you can only open one Cash ISA and one Stocks & Shares ISA each tax year. The only exception to this rule is the ‘Help to Buy ISA’, as, although this is a Cash ISA, you can still open a regular Cash ISA.
Can I Transfer My ISAs?
Transferring ISAs is usually straightforward and shouldn’t cost you any money. Transfers do not count towards your annual allowance, so there’s no limit to how much you can move. Pulling your ISAs into one can be a useful way to consolidate and better manage your money.
You can transfer freely between Cash ISAs and Stocks & Shares ISA, or vice-versa, as best suits your needs.
It’s important to ensure that you transfer directly from one ISA to another, as withdrawing funds means that you will use up your allowance when you deposit them in the new ISA.
Can I Withdraw From My ISA?
There’s no upper age limit on holding an ISA and you can withdraw anytime, tax free.
For the first time, you can now withdraw from and re-deposit funds into your Cash ISA without it counting as a new contribution, as long as it’s within the same tax year. For example, if you pay £15,240 into your ISA then withdraw £5,000, you can now put £5,000 back into your ISA without going over your annual allowance. This does not apply to Stocks & Shares ISAs.
Can I Pass on My ISA?
Your ISA can pass in full to your spouse on your death, which makes an ISA a useful tool for inheritance planning. The spouse is given a one off additional ISA allowance to the same value as your ISA.
If you do not have a remaining spouse, your ISA loses its tax-free status and becomes part of your estate.
Should I Choose a Cash ISA or Stocks & Shares?
The two main types of ISA are Cash ISAs and Stocks and Shares ISAs. The former is essentially a tax free savings account while the latter is a form of investment. Which of the two you choose depends on the amount of time you wish to invest for and what level of risk you feel comfortable with.
This is currently the most common type of ISA in the UK, however the interest rates for these are low – often lower than the rate of inflation – which can be off putting for some as their money could potentially lose value over time.
For example, the average rate of growth in 2014/15 for a Cash ISA was just 1.53%. While inflation has been low recently, the historic average of inflation is much closer to 5%. Even the best buy Cash ISAs on the market today don’t come close to 5%, even though many of them have higher introductory rates that usually plunge after the first 12 months or lock money away for a year with a high penalty for early withdrawals.
That said, a Cash ISA can be a useful place to hold money for a short time as, other than the long-term effect of inflation, your money is guaranteed not to fall in value.
Stocks & Shares ISA
If you’re hoping to receive a higher return on your investments, then a Stocks & Shares ISA could be a more suitable investment for you. For example, in the 2014/15 tax year, Stocks & Shares ISAs had a growth rate of 7.4%.
Rather than holding all of your money in cash, a Stocks & Shares ISA can hold a range of investments, such as share in publicly traded companies. These shares are often held with other assets, such as bonds or property, in an investment fund or portfolio. In this instance, you can leverage the expertise of an experience investment manager making choices on what to invest in for you.
Investment funds can vary in the amount of risk they hold, with some relatively low risk but low return and others relatively high risk but higher returns. However, with investments the returns are not guaranteed and can go down as well as up.
As markets can fluctuate in this way, it’s generally advised to invest for a minimum of five years as well as choose a level of risk that you’re comfortable with. With the returns on Stocks & Shares ISAs generally being higher, it could mean that you’ll reach your investment goal sooner than you would if you were to invest in a Cash ISA.
What Other ISAs Are Available?
Cash ISAs and Stocks & Shares ISA are not the only options available to you. In recent years, the number of ISA accounts has grown as savers and investors increasingly turn to ISAs to meet their long-term goals.
Here’s our breakdown of your options:
If you’re looking to put money away for your children’s future, a good option may be opening a Junior ISA (often called a ‘JISA’). The ISA is owned by the child, but anyone can contribute.
The annual allowance for a Junior ISA is £4,080 and both Cash and Stocks & Shares JISAs are available.
One major draw to this form of saving is that the child cannot gain access to the money until they turn 18, allowing the pot to grow. This means you can open a JISA for your child from the day they’re born and when it comes to withdrawing the money, they could have funds for a deposit on a house or to pay their university tuition fees.
For example, investing £340 a month for 18 years at the 2014/15 average Stocks & Shares ISA return of 7.42% could see the pot grow to over £150,000.
Help to Buy ISA
For those looking to buy their first time home, a Help to Buy ISA is a sensible investment to make as the government will boost your savings by 25% as long as you later use the money to buy a house.
You can deposit an initial investment of £1,200 and then up to £200 per month thereafter.
It goes without saying that the more you save each month (up to the maximum allowance of £200) the more of a bonus you will receive. The maximum amount the government will give is £3,000 which would require you to have saved £12,000.
However, if you are buying the property with someone else, and that other person is also a first time buyer, then you can both open a Help to Buy ISA, which means you’ll get double the bonus from the government. It is important to note though, that you will have to apply to the government via a solicitor to receive this bonus to put towards the deposit of your first time home. With that being said, this is still currently a great option if you’re saving to buy their first home.
Innovative Finance ISA
This is essentially a third type of ISA which makes it possible to invest through peer-to-peer platforms. Available from 6th April 2016, these ISAs bridge the gap between Cash ISAs and the Stocks & Shares ISAs and also count towards your annual ISA allowance of £15,240 for the 2015/16 tax year.
As a lender, this means that you will not be taxed on the interest you earn from lending your money in a peer-to-peer scheme.
Lifetime ISA (LISA)
The Lifetime ISA is a new government scheme which will be launched in April 2017. It is aimed at 18-40 year olds who are looking to invest for a first home or their retirement.
The draw to this type of ISA is that you can invest up to £4,000 a year and the government will add 25% to what you save, which could be up to £32,000.
However, there are a few important points to note before taking out one of these ISAs. Firstly, only first time buyers are able to use the ISA to buy a house, and if you withdraw the money for any other purpose or before you turn 60, you will not qualify for the government bonus.
How Can I Invest in an ISA?
Investing money into an ISA is simple and you can start with small amounts. There are three ways to invest:
- Start with a lump sum, good providers will let you invest from around £50
- Set up a monthly payment, again many providers offer a minimum contribution of £50 per month
- Transfer your existing ISAs to a new provider
Of course, you can also invest using a combination of all three options. Adding a regular investment amount to lump can see your ISA grow through the power of compounding returns.
For example, investing a lump sum of £1,000 then £100 a month for 10 years at the 2014/15 average Stocks & Shares ISA return of 7.42% could see your money grow to almost £20,000.
If you’d like to open a Stocks & Shares ISA today, you can invest with just a debit card and from as little as a £50 initial contribution or £50 a month with True Potential Investor. We’ll also help you set a goal amount for your investment, track performance over time and top up whenever you need to with our world-first impulseSave® technology.Open a Stocks & Shares ISA
Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest. Past performance is not a guide to future performance. Tax rules can change at any time.