Types of ISA: A definitive guide
In this post, we are going to introduce you to the different types of ISA, their best use case and all you need to know about the types of ISAs.e.g which one can help you get on the property ladder or help you save for retirement.
What are ISAs?
An ISA(Individual savings account) is a tax effective way to save. ISAs allow you to pay no tax or the minimum tax on the interest you make on your savings.
To be eligible for an ISA you will usually have to be:
- You must be at least 16 years old
- You must be a UK resident
- And you must have not subscribed to a another UK Cash ISA in the same year
So, you are probably wondering what does “subscribing to an ISA” mean. Subscribing to an ISA means paying into and opening an ISA. You are allowed to subscribe to one of each type of ISA every tax year and you must not exceed your ISA allowance each tax year.
Types of ISA
Below are a list of the main types of ISA.
1.stocks and shares ISA
2. Cash ISA
3. Self select ISA
4. Lifetime ISA
5. Help to Buy ISA
6. Innovate ISA
7. Junior ISA
You may also come across types ofISA known as flexible ISA, easy access ISA or Instant ISA. These types of ISAs are usually just brand names which banks and lenders create in order to further distinguish their ISA product from others on the market.
How Many ISAs Can I have?💶🙌🏻
The current tax rules allow you to have or open one of each type of ISA every year but you can only put the maximum tax year ISA allowance in all of these ISAs.
This means your combined savings in all your ISA accounts must not exceed your current tax year ISA allowance for the current year. The tax year ISA allowance is currently £20,000.
How many ISAs can you open in one year?🔔❄
You can have multiple ISAs but not more than one type of ISA and your total Tax year ISA allowance must not be exceeded in your combined ISA contributions. Each ISA may also have its maximum contribution limit as well.
What to do if you open more than one type of ISA?😮ℹ
If you mistakenly open more than one type of ISA e.g a lifetime or stocks & shares ISA in a single tax year, you should notify your ISA manager at the earliest opportunity. In some cases, the ISA may be allowed to remain open, once you have consulted with HM Revenue and Customs.
The rules for stocks and shares ISAs are the same as with cash ISAs. You can only pay into one each tax year, but can open a new type of ISA with a different platform each year if you wish to.
If you have multiple of the same type of ISA open, example multiple stocks and shares Isa open, you are only allowed to pay into one of them in each tax year.
If you only wanted to invest a portion of your Isa allowance via the second Isa provider, this could be difficult as it will mean you are not able to add any new money to the original Isa in the same tax year.
The other option to consider is transferring your existing portfolio to the other provider, although this might incur some costs.
How do ISA transfers work?🌟✈
ISAs are tax free saving wrappers and moving them to get a better deal is common. If you move your ISA in the wrong way you could just end up losing your tax free status and costing you interest made from your ISA.
Why should you transfer your ISA?🌈ℹ
You could transfer your ISA for a variety of reasons such as getting a better rate or because of reasons such as the cost of your current ISA manager or their performance.
You might also be transferring all your ISAs to a new manager to have all your savings in one place or rather move all your savings to different places in a scenario where your combined savings are over the financial services compensation schemes £85,000 per account.
There are different types of ISA providers out there and you can view their various offerings, including the way they invest, their past returns etc all online. This will give you an idea of which provider you want to move your money to.
To transfer an ISA you simply open a new ISA account then fill in an ISA transfer request form and send to your old ISA manager. It’s that simple. Once the transfer is done you will get a closure statement showing exactly how much you have transfered. Some ISA managers will even allow you to sart earning intrest from the day you submit a transfer request form even though the ISA funds havent entered the new account.
Be sure to be on the lookout for any charges or transfer out fees imposed by your current ISA manager.
How long does your ISA transfer take?👀
This depends on what type of ISA you are transferring. If you are transferring a cash ISA then this should take 15 days. If you are transferring a stock and shares ISA then this will usually take 30 days.
If your ISA transfer takes too long you can report it to the Financial ombudsman.
Which ISAs can you transfer?❄⌛
You can transfer any type of ISA although there might be some penalty for ISAs which are fixed term or notice ISAs. Some ISA providers do not accept ISA transfers.
If you have a notice ISA, it is probably best to give notice to your current ISA provider to avoid any charges.
If you choose to proceed without giving notice then you should compare how much interest the new ISA will earn you and the cost of the penalty. If you still make more money by transferring your ISA then by all means transfer your ISA if you wish.
What are stock and share ISAs and how do they work?
A stocks and share ISA is like an investment account where your ISA contributions are invested in company shares and stocks. The stocks and share ISA is one of the main types of ISA. There is no tax on interest made or on dividends earned. Your stock and shares ISA can also be used to invest in different investment vehicles such as unit trusts, open-ended investment companies (Oeics) and investment trusts, as well as government bonds and corporate bonds.
What tax is due on stock and shares ISAs?🤑🏠
Capital Gains tax may be due if you exceed your annual capital gains tax allowance which is currently £11,700.
Capital gains tax is the tax you have to pay when you sell a property investment, shares or jewelry. If you buy your shares are a value of £5000 and sell them for £10,000 you might have to pay Capital Gains Tax on the £5000 profit but this is only if you exceed your capital gains tax allowance.
Dividends held in a stocks and shares ISA are also tax free. Dividends are another means of generating a return from your investment. When a company makes a profit they may pay a dividend to their shareholders. Typically we all have a yearly dividend tax allowance of £2,000 but if we exceed this then you will pay tax on it based on our current tax band.
This currently stands at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
Some stocks and shares ISA will invest in corporate bonds. This is when your contributions are lent to businesses for a fixed rate of return. Rather than investing in the companies by owning stocks which can appreciate in value you simply loan the business money for a fixed term and they repay you your capital at the end of the term as well as monthly interest repayments.
If you invest in corporate bonds via your stocks and shares ISA or any type of ISA then you will not be due any tax on interest earned from corporate bonds.
If you’re investing in corporate or Government bonds outside a stocks & shares ISA, it’ll fall under the remit of the personal savings allowance which gives you £1000 tax free depending on your tax band. This means basic-rate (20%) taxpayers will be able to earn £1,000 interest with no tax while higher-rate (40%) taxpayers – will be able to earn £500 interest with no tax. Additional rate (45%) taxpayers don’t get a tax-free allowance.
This allowance also covers your normal savings interest in a bank as well as other forms of interest. As with the dividend allowance, you’ll owe tax on any interest earned above its limit.
Stocks and shares ISA are inherently different from Cash ISAs because Cash ISAs are when your funds are deployed in a savings account and interest is paid on your contributions. Stocks and shares ISA are a more risky type of ISA and the value of your contributions can go up or down as they are invested in companies which performances can change due to a number of factors such as business cycle, economic climate or political influences.
How do you open a stocks and shares ISA?✔🚩
Stocks and shares ISAs can be found through a variety of platforms. Some platforms will charge a fee. You will also have to then choose which stocks and shares ISA funds to buy. Th fund manager will also charge you a fee. Some fund managers will manage the whole process and decide what funds to invest your money in for you.
What fees are involved with Stocks and Shares ISA?
Both the platform and the funds you invest in will cost you money. The main fees to look out for are:
This is the charge for being able to access your fund. This can either be a flat fee or a percentage of the funds value.
Fund manager charge (also known as annual management charge).
The fund managers of the funds you buy will also charge you a fee.This is always a percentage and can typically vary from 0.1% – 1% per fund, depending on which fund you’re investing in.
This is the cost every time you buy or sell a fund on the platform. These can be anything from £0 to £25. So if you’re an active trader, looking for a low trading charge should be a high priority.
Transfer out fee.
The cost involved in moving your stocks & shares ISA from one platform (provider) to another. This is usually charged per fund, so the more funds you have within your stocks & shares ISA, the more it will cost you. However, some platforms don’t charge a fee for transferring out.
Not sure what all the fuss about? You can use platforms that manage the investment decisions for you. All you simply have to do is answer a few questions, select your risk profiles, targets and contribute your investments in one lump sum or monthly.
Stocks and shares ISA are covered by the financial services compensation scheme up to £50,000.
As with all investing, your capital is at risk. Tax rules may change in the future. If you are unsure if a Stocks and Shares ISA is the right choice for you, please seek independent financial advice
What are Cash ISAs and how do they work?🔔
Cash ISAs are a type of ISA which are just like saving accounts which pay interest. The interest they pay is tax free and outside of your personal allowance. Cash ISAs will usually pay a fixed rate of interest or a variable rate.
The personal savings allowance which gives you £1000 tax free depending on your tax band.. This means basic-rate (20%) taxpayers will be able to earn £1,000 interest with no tax while higher-rate (40%) taxpayers – will be able to earn £500 interest with no tax. Additional rate (45%) taxpayers don’t get a tax-free allowance.
To open a cash ISA you will have to be:
- Over 16 years old
- A Uk resident
Cash ISAs can be easily opened although the maximum you can put in them is your personal tax allowance which currently stand at £20,000.
Cash ISAs are usually considered a safe investment vehicle. They are covered by the financial services compensation scheme up to £85,000 per account.
*As with all investing, your capital is at risk. Tax rules may change in the future. If you are unsure if a Cash ISA is the right choice for you, please seek independent financial advice *
Cash vs stocks and shares ISA👁
The difference between the Cash ISA and the stocks and shares ISA aren’t many. As you know every year you have a personal allowance which you can invest in any type of ISA tax free. You can either choose to put this in a cash ISA, a stock and shares ISA or any other ISA. The main difference between the Cash ISA and the Stocks and Shares ISA is that the cash ISA is just like leaving your money in your banks saving account where you could be liable for tax on any returns you make whilst with a Cash ISA you will not have to pay any tax.
Cash ISAs are of course kept in cash whilst stock and share ISAs are invested in equities through a varying amount of financial assets such as Open-ended investment companies, corporate bonds, government bonds, unit trusts etc.
If you want you can also hold self select company shares in your stocks and shares ISA portfolio but beware that the risk to your portfolio will beat its highest when there isn’t enough diversification. Some stock and shares ISAs will also allow you to hold cash in your portfolio but the returns from cash might be less competitive in comparison to the returns from the equity assets held in your stocks and shares ISA.
Based on the type of ISA you have you maye be able to withdraw money from both the cash and stock and shares ISA without any cost to you. Some types of ISA will have fees attached to any withdrawals but cash ISAs are usually free to withdraw from at any time.
You can switch from a cash ISA to a stock and shares ISA and vice versa although there might be fees for closing your account. You should check this with your ISA provider.
Stock and share ISAs will usually have a management cost involved which can go up to 6%. You should ensure you compare providers before deciding on an ISA. If you are certain you know what you are doing you can invest ins the stocks and shares ISA buy purchasing access to funds(investing) via a funds supermarket or discount broker.
Remember, regardless of what types of ISA you get your returns must beat inflation for them to be actual returns.
What are Self select ISAs?👁
Self select ISAs are a type of ISA which let you pick the financial assets they carry. A self select ISA is like any other type of ISA, you are eligible for the annual ISA personal allowance and any returns you make will be free of any tax including personal and capital gains tax.
As you can imagine, because you pick the assets your self select ISA will hold it is your responsibility to ensure you have a balanced and diversified portfolio and not the fund managers job and for this reason a self select ISA will be much cheaper than a typical ISA.
You don’t have to put all your ISA allowance in one type of ISA, you can spread it across separate types of ISAs.
Self select ISAs aren’t for everyone. You must be sure you have the experience to make investment decisions for yourself.
You can chose a variety of assets for your self select ISA including unit trusts, investment trusts, open-ended investment companies, bonds, gilts and exchange traded funds.
When dealing with self select ISAs you can choose to either work with a broker who offers advice and one who doesn’t (known as execution only trade). Execution only brokers are much cheaper.
What is the Lifetime ISA?
The Lifetime ISA is a type of ISA which can be used for first-time buyers or retirement savings.
The lifetime ISA allows you to put a maximum of £4000 away each year and receive a government bonus of up to £1000 a year( 25%).
What you need to know about the Lifetime ISA
- You must be between 18-40 years old & a Uk resident to open a LISA
- You can only withdraw your LISA ( penalty free) before 60 to buy your first home
- Your first home must be below £450,001
- You will face a Government penalty of 25% if you withdraw your LISA before 60 and do not use it for a home
- You can transfer your current ISA into your LISA and transfer your LISA out but you will have to pay the 25% charge for this if it is done before you are 60.
- Interest earned on your LISA as well as the 25% Government bonus is tax free
Lifetime ISA FAQs
Who is eligible to open a lifetime ISA?
You must be 18-40 years old and a UK resident to open a LISA.
A first time buyer is someone who does not own any property in the World. This includes property in a will, trust or as a result of a divorce.The maximum house price you can purchase utilizing the LISA is £450,000. You can purchase a property with someone else on a LISA but the maximum property price does not double.You can also use the LISA with other First time buyer schemes such as the Help to buy equity loan scheme.
Can I open my Lifetime ISA with other ISAs?
Yes you can as long as you don’t exceed your current ISA allowance for the tax year which currently stands at £20,000. You can however not use the bonus for both when purchasing a home. You will have to pick which one you use to buy a new home and any funds withdrawn from the other types of ISA products will incur a withdrawal penalty.
When can I withdraw money from my Lifetime ISA?
You can withdraw your money before the age of 60 as usual although you will face a Government withdrawal penalty of 25% or you can withdraw it when buying a first home under £450,000 without any penalty. The property must be a mortgaged property and you can only utilize the LISA 12 months after opening it with your solicitor acting on your behalf to ensure your LISA bonus is activated and LISA account is closed without any penalty. If your property purchase is taking more than 90 days you can contact HMRC for an extension.
If you fail to buy a property you can return all the funds and the interest missed will be paid and it will not be classed as a withdrawal.
You can of course always withdraw your money after age 60 and above with no penalty whatsoever.
The cost of early withdrawal on your Lifetime ISA:
|25% Government penalty
A withdrawal charge won’t apply if you’re:
- using it towards a first home
- aged 60
- terminally ill with less than 12 months to live
- transferring to another Lifetime ISA with a different provider
- If you die, your Lifetime ISA will end on the date of your death and there won’t be a withdrawal charge for withdrawing funds or assets from your account.
How is the Government bonus paid on my Lifetime ISA?
The Government bonus will be paid monthly from 2018 and this will allow you to earn more interest on the cumulative deposits.
How long can I contribute to the Lifetime ISA?
Contributions to your LISA end when you turn 50.
*As with all investing, your capital is at risk. Tax rules may change in the future. If you are unsure if a Lifetime ISA is the right choice for you, please seek independent financial advice.Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.Please seek independent financial advice. *
What is the Help to Buy ISA?
The help to buy ISA is a type of ISA with a tax free wrapper where you can save up to £200 a month and an additional £1200 a month in your first month.The Help to Buy ISA comes with a maximum £3000 tax free Government bonus. If you use the money in your help to buy ISA to buy a home the government adds 25% of whatever is in your help to buy ISA to your mortgage deposit as a bonus with two exceptions.
- You need at least £1600 saved to get the bonus
- The maximum bonus you can get is £3000 (so the maximum amount the government will pay you a bonus on is £12,000)
Quick facts about the Help to Buy ISA:
- To qualify for the help to buy ISA you need to be a UK resident and over the age of 16. The deadline for applying for a Help to Buy ISA is December 2019 and you must use it for a mortgage deposit by December 2030 if not you will not be eligible for a bonus.
- You can only open the Help to Buy ISA per person and not as a couple etc The maximum property price you can purchase with the Help to buy ISA is £450,000 in London and £250,000 anywhere outside London.
- You can only open one Help to buy ISA although you can transfer it to a different provider at any time.
- Your maximum personal ISA allowance per year is £20,000
- Your solicitor applies for you to get the Bonus for your mortgage deposit
- You can withdraw your money at any time but of course the withdrawn amount will not count towards your bonus.
Some help to Buy ISA providers include:
|Buckinghamshire building society
|Nationwide Building society
|Apply on their website
*As with all investing, your capital is at risk. Tax rules may change in the future. If you are unsure if a Help to Buy ISA is the right choice for you, please seek independent financial advice *
What are Innovative ISAs?🎁
Innovative ISAs are a type of ISA which are specific for the peer to peer lending model. The innovative ISA allows you to invest your funds in a variety of peer to peer platforms with some or all of your ISA allowance and still benefit from the tax free and capital gain status.
This allows you to lend your money in a variety of ways such as to fund properties, to businesses etc. This model is currently not protected by the financial services compensation scheme but most platforms provide a reserve fund to cover you in case anything goes wrong.You must remember these funds are discretionary and hence are not regulated by any body. This means you might be successful in claiming if something goes wrong or you might not.
How does the innovative ISA differ from the Cash ISA?😮
Innovative ISAs offer more than Cash ISAs in regards to interest rates, this is due to the fact that innovative ISA platforms cut out the middleman and thereby bring about savings to borrowers and more interest to savers.
Comparing innovative ISAs can prove difficult due to the huge differences in propositions between different peer to peer platform. Taking a look at just the interest rates as a comparative measure will be misleading as other factors such as the reserve funds(incase anything goes wrong), how funds are deployed and diversified etc all matter.
The higher interest rates on offer with innovative ISAs also come with a huge risk which is currently not covered under the financial services compensation scheme. This means you can certainly lose all your money with no recourse.
How do innovative ISAs work?🚩
Innovative ISAs are similar in their tax free status to other types of ISAs, they allow you to lend money through an FCA regulated peer to peer platform to borrowers. This may be businesses or private individuals or through property loans. Peer to peer is also abbreviated as P2P and the forms of loans permitted under the innovative ISA include, small business loans, personal loans and property loans as indicated above.
Innovative ISAs cannot be used for equity based lending and therefore there is a completely different regulation for this under a different ISA regulation.
Innovative ISAs are available to uk taxpayers who are above the age of 18.
The current ISA allowance for the 2017/2018 tax year is £20,000 and this is subject to change for the next tax year. You do not have to invest this whole sum and you can invest in increments over the tax year.
Some of the well know Innovative ISA providers include zopa, ratesetter and funding circle.
What is the Junior ISA?✔
The Junior ISA is a type of ISA which is tax free anda a child can access when they turn 18.
It can be structured as a simple savings cash ISA. You can make contributions to this ISA on behalf of your child if they are under 18. You can make contributions up to the total annual allowance.
You can open a junior ISA if your child is under 18. You cannot have a child trust fund and a junior ISA. You can transfer your child trust fund to a junior ISA.
This product can also invest in stocks and shares of companies.
The maximum yearly contributions are £4,128
To open a junior ISA you need to be over 16 or have parental authority or your parents can open it for you.
Junior ISAs have registered contacts who are the only people who can give investment instructions on the account. All correspondence about the account is sent to the registered contact.
How are contributions made to the Junior ISA?🔥
Contributions can be made to the Junior ISA via the friends and families contribution for. The child cannot access the contributions until they are 18(except they become terminally ill or die before that age).
You can only have one Junior ISA per tax year, it can be transferred to a different provider and the funds can only be accessed by the child after they turn 18.
In this blog, we talked about the different types of ISA products which are available on the market. The different types of ISA products will be suitable to you based on your investment knowledge, your risk threshold and yourfinancial plans.
If you are looking to buy a house then one type of ISA may be more suited to you than another type of ISA. If you are unsure which type of ISA product fits you then you should seekindpendent financial advice before making your decision.
ISAs are a great tax savings wrapper. Ensure you have a full understanding of them before you invest.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.