In this article, we address:
- What types of ISA are there?
- How many ISAs can you have?
- How do you open an ISA?
- Can you transfer an ISA?
- Is your ISA flexible?
- Should I put my money in a high-interest savings account or an ISA?
What Is An ISA?
‘ISA’ stands for Individual Savings Account. It’s a type of account where any interest or gains earned on the money placed in it is protected from tax. This means that any gains or income you make (e.g. interest earned or dividends) are shielded from tax. You can put up to £20,000 a year into ISAs (the annual allowance for the 2019/20 tax year – be aware this may change in the future) and you have a lots of choice when it comes to what to do with the money – you can leave it in cash savings or invest it in the stock market or even peer to peer lending.
What Types Of ISAs Are There?
There are lots of different types of ISAs out there, which can make the choice of which to opt for very confusing. The best one to go for will depend on your individual circumstances and your appetite to take investment risk.
Cash ISA
This is a traditional ISA and the most widely held type of ISA account. Your money is held in cash like a regular savings account, and you earn interest on your balance. The best ISAs out there at the moment offer interest of around 1.5% AER. One type of cash ISA is a Help to Buy ISA, which allows first-time buyers to save up to £200 a month (£1600 in the first month), with the government paying a bonus of 25% on balances of £1,600 or above.
If you want a Help to Buy ISA, you better hurry as can only open one up to November 2019. Money can continue being paid into it up to November 2029, though.
Stocks & Shares ISA
Your money is invested in financial assets such as stocks, government bonds, corporate bonds, exchange-traded funds (ETFs), investment funds or commodities. Any income or gains are protected from tax. Your capital is at risk as with any investment.
Lifetime ISA
Aimed at people under 40, this account allows you to save up to £4,000 a year with the government topping it up by 25%
These bonus payments will continue until the individual has reached the age of 50. Bonuses are only paid if the holder uses the funds to buy a first home or withdraws the money after the age of 60. Early withdrawals (for reasons other than a first home purchase) will incur a penalty of 25% (i.e. the government’s bonus).
Innovative Finance ISA
A type of ISA that allows you to invest in alternative types of investments, such as peer-to-peer loans or crowdfunding investments. These are newer products and are offered by the likes of Funding Circle and Zopa, among others.
Junior ISA
For anyone who wants to save on a child’s behalf. A lower annual limit applies – this is £4,368 in the 2019-20 tax year, up from £4,260 in 2018-19. The child has access to the funds from age 18. When he or she is 16, they can open their own adult ISA and both accounts can be contributed to until they reach 18.
How Many ISAs Can You Have?
Technically, you can have as many ISAs as you like, but you can only open one of each type of ISA per tax year.
The annual allowance (£20,000 in 2019/20 tax year) can be spread across different ISA types, but confusingly, you can only put money into one of each type of ISA in a given tax year.
This means you could open and put funds into, say, both a cash ISA and a stocks and shares ISA, but not two different cash ISAs (in rare circumstances, providers may allow this if they’re both held with them – you’ll need to check your T&Cs!).
If you already have ISAs from previous tax years, you can leave these open but not contribute to them if you’ve added funds to a new one in the current tax year.
If you do not use all of your ISA allowance in a given tax year, it’s lost – you cannot carry any allowance over to the following year.
How Do I Open An ISA?
Opening an ISA account is very similar to opening any type of bank or investment account, and can be done online, over the phone, by post or in bank branches.
You need to be a UK resident over the age of 16 for a cash ISA and over 18 for an investment or innovative finance ISA, and you’ll typically need ID, proof of address and your National Insurance number. You can’t have a joint ISA account.
So, What Do I Do With My Old ISAs? Can I Transfer Them?
You don’t need to be stuck with lots of old ISAs – you can transfer them to a new ISA account with the same or different provider, and you can also transfer funds into a different type of ISA if you wish (e.g. from a cash ISA to a stocks and shares ISA).
Transferring an ISA won’t affect your £20,000 annual limit. If you do transfer money out of an ISA into a new one, though, you need to make sure you complete what’s called an ISA Transfer Form.
Can I Withdraw Money From My ISA And Put It Back?
If your ISA is flexible, you can transfer money into and out of the account without affecting your annual limit.
For example, if you transferred £20,000 into a cash ISA at the start of the tax year but then withdrew it to help fund a house purchase, if you then later in the same tax year transferred £10,000 back into the account, this would only be allowed if the ISA was ‘flexible’. If the ISA is not flexible or you transfer the ISA over to a new provider before paying the money back into the account, then you would have been deemed to have used up your allowance for that tax year.
Watch The Small Print
As with any financial product, it’s important to check the T&Cs of any ISA you wish to open, as some allow transfers from other accounts (without affecting your annual limit), while others don’t. Similarly, some may carry penalties for early withdrawals (say, if you’re opening a fixed term cash ISA).
It’s important to note that cash ISAs are covered by the FSCS compensation scheme, which means up to £85,000 per customer per bank or building society is covered in case the provider goes bust. If the provider of a stocks and shares ISA goes under, your balance is protected up to £50,000 by the FSCS.
Should I Put My Savings Into A Cash ISA Or A Higher Interest Savings Account?
This depends on factors such as the interest rates available, the amount of savings you have and your tax bracket.
In the UK, the government allows you to earn £1,000 in interest before having to declare it to the tax man, if you’re in the 20% tax bracket, £500 if you’re a higher-rate payer. The allowance falls to nil if you’re an additional rate payer.
This means that if you’re in the lower income tax bracket and have the choice between earning £500 a year in interest from a high interest savings account (non ISA) and £300 from a cash ISA that pays a lower interest rate, then it could be worthwhile sticking with the high interest savings account.
However, if you don’t need the money in the near future and if you expect that you may either want to invest that money in the future or believe that interest rates will rise, then it could actually make more sense for you to put the funds into an ISA.
You may earn less interest this year, but you may be able to more than compensate for the difference in future, given that the money will be able to benefit from the tax-free status as long as they’re in an ISA. This is especially relevant for anyone saving for the long term and in the current environment where interest rates on savings accounts and ISAs are very similar.
The UK government has a helpful page here with further information on personal savings allowances.
What Do I Need To Open An ISA?
Lastly, here is a handy checklist of questions to ask yourself when looking into ISAs and how to go about opening one:
- How much are you looking to save and invest this tax year?
- What’s your appetite for risk – do you want a safe cash savings account, do you want to invest in the stock market, or try peer to peer lending?
- Are you saving for specific things like a first house purchase or retirement?
- Do you have ISAs from previous years that you would like to transfer into a new one?
- Will you need to withdraw the money in your ISA at some point this year and if so, do you plan on paying it back into the ISA?
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