If you’re remotely familiar with the world of finance and investment, then you might have heard the term ‘ISA’. This term stands for ‘Individual Savings Account’. It’s a form of savings account on which you don’t have to pay any tax, up to a certain threshold. At the moment, the cap for a tax year is £20,000.
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Different types of ISA
ISAs come in many different forms. The one that matches your needs will depend on your situation, and so it’s worth examining the options before committing to one of them.
Cash ISA
The most straightforward variety is the Cash ISA. You pay cash in, and you draw cash out. There’s a little bit of variety to assess, depending on which bank or building society you opt for. In some cases, you might face charges for withdrawing. Make sure that you’re aware of these charges before you invest.
Stocks and Shares ISA
A stocks and shares ISA is a way of investing in the stock market, rather than with cash directly. The risks are greater, since you’re tied to the value of the assets being bought. Conversely, the rewards are greater for the same reason. Generally speaking, these are a better option for the long term, since longer time periods tend to flatten out the fluctuations and volatility inherent in the stock market.
Lifetime ISA
The Lifetime Savings ISA is a relatively new variety, designed to help first-time homebuyers and would-be retirees to build up some savings. They’re available to those between eighteen and forty, but they have a compelling advantage: the government will add 25% to any savings you put into the account every year, up to a maximum of £4,000. There’s a condition, here, which is that you’re only allowed to take the money out when you’re 60 – or when you spend it on a new home. If you need to take the money out early for any other reason, you’ll be charged extra. Be wary!
Junior ISA
Finally, we should consider the Junior ISA. This is a form of savings account set up by parents, on behalf of children younger than eighteen. Any money put into this account is ultimately the property of the child, and will be accessible when they turn eighteen. In other words, you’ll want to be fairly confident that they’ll make good use of the money before you set up the account for them.
Here, we’ve touched upon just a few of the available options – and there are further complexities to consider before you set up your account. Whatever you open your ISA for, and whichever variety you decide upon, it’s important to think about how you’ll be tax-efficient, and where the limits for your tax-free allowance lie.
