As a UK resident, you’re able to invest up to £20,000 tax-free per year (as of 2020/21) when using an Individual Savings Account (ISA).
There are many different ISAs to choose from, so it is vital to understand the unique properties each one has to offer before deciding which best matches your investment aims. Here is an outline of the key features of the five different types of ISAs.
5 Different Types of ISAs
- Cash ISA
All UK residents aged 16 or over are eligible for Cash ISAs, which allow for tax-free deposits of up to £20,000 per tax year. Both easy-access and fixed-term accounts are available, with the potential rate of return typically increasing with the length of the investment term. Cash ISAs are protected by the FSCS, which gives individuals protection of up to £85,000 per financial institution.
- Innovative Finance ISA
What is an IF-ISA? The Innovative Finance ISA (IF-ISA) is a tax-free investment opportunity that allows consumers to invest in individual and business loans via Peer to Peer lending platforms. IF-ISAs come with more risk than Cash ISAs, but offer the potential of higher returns.
IF-ISAs operate via Peer to Peer lending platforms, which pair up willing lenders (or investors) with individual and business borrowers. Depending on the IF-ISA provider, loans may be backed by property assets, providing an extra level of security. Bypassing traditional financial institutions, Peer to Peer loans tend to provide quick and easy access to funds for borrowers, and on the investment side, the minimum investment can be as low as £100.
IF-ISAs are not protected by the FSCS and your capital is at risk.
- Stocks and Shares ISA
Stocks and Shares ISAs allow you to invest money into a range of different ventures such as investment funds, trusts, individual shares and government or corporate bonds. While Stocks and Shares ISAs also offer the potential to yield higher returns than Cash ISAs, your capital is at risk and the stock market may be subject to high volatility.
- Lifetime ISA
Lifetime ISAs are typically used to save for retirement or to purchase a first home. Only UK residents between the ages of 18 and 39 can open a Lifetime ISA. Individuals may deposit up to £4,000 into this type of ISA each year up to the age of 50.
One advantage of the Lifetime ISA is that every year, the government will add a 25% bonus to your savings, meaning that you can increase your savings by up to £1,000 per year. Both cash and stocks and shares – or a combination of both – may be held in your Lifetime ISA.
5. Junior ISA
Junior ISAs allow parents, relatives or even family friends to deposit up to £4,368 (for the tax year 2019/2020) into an ISA for a child under 18. Individuals may choose to invest in stocks and shares or cash, or choose a combination of both. Though stocks and shares typically outperform cash in the long term, your capital is at risk.
Once the child reaches 18, a Junior ISA automatically converts to a standard ISA and control of the account will be passed on to the beneficiary.
Moving or transferring your ISA
If you wish to transfer your ISA from a current provider to a new one, you may do so with Cash, Stocks and Shares and IF-ISAs. You must arrange a transfer with your current provider to make sure that your investments remain within the ISA tax-free wrapper.
Which Type of ISA is Best For Me?
Your annual tax-free allowance of £20,000 can be split between different kinds of ISAs, allowing you to maximise the potential returns of your investments – but which kinds of ISA are right for you? The three key elements to consider when making this decision are:
- What do you wish to achieve?
- How long do you want to invest for?
- What degree of risk are you willing to take?
As with any investment decision, doing your research is vital. Look carefully into the reputation and investment terms of the providers that you are considering.
Remember that each type of ISA has risks, though the degree of risk varies from one type to another. Before opening an ISA, make sure you have a clear understanding of the terms and risks involved. If you are in doubt, consult a qualified financial advisor for more information.