Individual Savings Account (ISA) encourages people to save and invest tax-efficiently, to prepare for their better financial future. With ISAs, people can save up to £20,000 per year tax –free (as at 2020/21).
There are different types of ISA, each with its unique features. So, you need to understand all the different ISAs to choose the one that best suits your needs. If you don’t wish to go for one specific kind, then you can also split your £20,000 allowance between different ISAs. This way, you can spread out your funds over several investment opportunities. It is essential to assess all types of ISAs because if you do not use your allowance, then it will not roll over to the next year.
Types of ISAs
Cash ISAs allow contribution of up to £20,000 per tax year (2020/21). It is available to all UK residents aged 16 or above.
With this type of ISA you can either choose a fixed-term or an easy access account. Your choice will impact the rate of return, depending on the length of your commitment.
The Cash ISAs are protected by the Financial Services Compensation Scheme (FSCS). This means you are covered for up to £85,000 of savings per person, per financial organization.
Stocks and Shares ISA
A stocks and shares ISA is a tax-efficient investment account. This type of ISA allows you to spread your funds into different investments, including trusts, shares, government bonds, corporate bonds or investment funds. This way, you get higher returns compared to cash ISA, but only at capital risk.
Innovative Finance ISA (IFISA)
Innovative Finance ISA allows you to lend through peer to peer (p2p) platform and earn tax-free interest. IFISA pairs up willing investors or lenders with business and individual borrowers through a user-friendly online p2p platform.
With Innovative Finance ISA, you can loan your money to borrowers across various projects in a range of industries. Each IFISA provider’s services and offers are different so you must read their product terms carefully before you invest.
Kuflink is a P2P platform which allows investors to have the security of UK property-backed investments. This is one of the most trusted IFISA providers which offers one, three or five-year terms with an interest rate of up to 7% per annum*. The platform pays the Innovative Finance ISA interest annually and doesn’t charge any investment or platform fees.
A property ISA is actually not a type of ISA like Stock & share or cash ISA. Instead, it is a fund which you can use to invest through an IFISA or stocks & share ISA. This means that the interest you earn from this investment will not be taxed. With these ISAs you can invest in a fund which in return invests in UK property, rather then dedicating your funds to only one property.
Junior ISA account allows parents or relatives or friends to save up to £4,368 (for the tax year 2020/21) for children under the age of 18. This is also a choice of either cash ISA or stocks & shares ISA. Stocks and shares are riskier; however, usually outperforms the cash ISA in the long-term. This type of allowance can be split between both investment types.
Once the child is 18, a junior ISA turns into a standard ISA automatically, and control of that account is passed over to them.
With Lifetime ISA, you can purchase your first home, or you can save for later. This type of ISA is available to UK residents aged 18 or above and under 40. You can save up to £4,000 every year till you are 50.
The government adds a 25% bonus to your savings, a maximum bonus of up to £1,000 each year. You can hold cash ISA, stocks & shares ISA in your Lifetime ISA or you can have a combination of both.
Tip: if you pay a maximum amount of £4,000 then this can leave you about £16,000 that can be paid into various ISAs.
Transferring your ISA
You can transfer cash ISA, stocks & shares ISA and even Innovative Finance ISA that you hold with another provider. Previous year’s subscription doesn’t count towards your ISA allowance. However, your current year subscriptions can be transferred in whole and will count towards your ISA allowance.
Remember, you can’t just take your funds out of one ISA account to put it into another, since your money will lose its ISA status. You can arrange a transfer with your ISA provider to make sure your investments remain within the ISA wrapper.
How to choose the Right ISA?
You have the option of splitting your annual allowance of £20,000 among different ISAs. This allows you to spread your investments; however, how can you choose the right one?
You first need to consider what it is that you wish to achieve. How long you are able to invest your funds for and the level of risk you can take.
Remember, always do your research. Look at the potential provider’s reputation and their offerings. Select potential Innovative ISA providers that does what you want. Every ISA type has its risks, and you need to have a clear understanding of how the investment works and whether the provider offers you the right opportunity. If you still are in doubt, talk to a qualified financial advisor to learn more.