ISAs arrived on April 6, 1999, introduced by a government that hoped they would encourage people to save for the future. Since then they’ve become an increasingly popular means of saving and investing in a tax-efficient way.
For many, 2020 so far has been financially tough. For others – those already retired or able to work from home – lockdown might’ve meant a chance to save. Recent research from the Centre for Economic and Business Research (CEBR) shows that average monthly household spending dropped 30% (£795) during lockdown.
You might be thinking about what to do with this saved amount. If you’re considering an ISA, you’ll need to think about which one is right for you.
Read about the different types of ISA available, and if you are still unsure which one to choose, speak to us.
1. Cash ISA
Recent figures reported in the FTAdviser show that £43 billion was paid into cash ISAs in the 2018/19 tax year.
Essentially the same as a traditional savings account, a Cash ISA has the added benefit that you don’t pay tax on the interest you earn.
A Cash ISA is open to UK residents aged 16 or over. They are a great way to save if you have a short-term financial goal in mind, or as a way to build an emergency fund.
There is an overall limit on the amount you can contribute to ISAs in a tax year, known as the ISA Allowance. This currently stands at £20,000.
This limit is across all ISAs you hold so, for example, if you hold a Cash ISA and a Stocks and Shares ISA, you could contribute £10,000 into each during a single tax year.
The money held in a Cash ISA is protected under the Financial Services Compensation Scheme (FSCS) too. The scheme protects your money if a financial institution fails, up to £85,000.
While you can be confident that your money is safe, available interest rates on ISAs have been low since the financial crisis. More recently, coronavirus has also taken its toll.
A recent FTAdviser report confirmed that ‘average savings rates for ISAs, easy access and fixed bonds have fallen to their lowest levels since records began in 2008.’ The report goes on to state that ‘the average easy access ISA rate at the start of June had fallen to a low of 0.45%, from 0.85% in January.’
You might also find that a Regular Saver Cash ISA, where you deposit a set amount each month, or a fixed-term ISA, where your money is held for a fixed amount of time, could secure you more competitive rates.
There are still good deals out there so shop around or contact us.
2. Stocks and Shares ISA
The amount paid into Stocks and Shares ISAs fell by £5.2 billion in 2018/19 compared to the previous tax year. During the same period, the overall amount of ISA subscriptions increased, suggesting a large influx into Cash ISAs.
So why open a Stocks and Shares ISA?
As with Cash ISAs, Stocks and Shares ISAs are tax-efficient. Any gains you make on investments in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).
Investing in the stock market increases the opportunity for growth and the potential to outstrip inflation, but the risks are higher too. You might consider a Stocks and Shares ISA if you are looking to invest over the longer-term.
A Stocks and Shares ISA is open to any UK resident over the age of 18. You can invest in a range of different investments, including individual shares, investment funds, investment trusts, and government and corporate bonds.
You can match your investment choices to your risk profile or speak to us. We can help you build an investment portfolio that is right for you.
3. Innovative Finance ISA
An Innovative ISA aims to match investors who are willing to lend, to individuals, businesses, or property developers who want to borrow. This is done through peer-to-peer lenders.
The parties looking to borrow funds will have been unable – or chosen not – to obtain a traditional bank loan. The borrower will offer you a rate of interest when paying back your invested amount. You’ll generally find that the higher the rate of interest, the higher risk the investment.
Innovative Finance ISAs have been available since 2016 and can be opened by any UK resident over the age of 18.
An Innovative Finance ISA would not be recommended if you are risk averse as you could lose the value of the investment. They are typically higher risk than traditional investments and peer-to-peer platforms also don’t come under the protection of the FSCS.
The right ISA for you
The ISA you choose will depend on many factors, including the proposed length of investment, your attitude to risk, and what you want to use the money for.
Speak to us if you are unsure about which ISA is right for you.
Get in touch
If you’d like to discuss opening an ISA, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.