INTRODUCTION TO ISAs

You might have heard about ISAs but you might not be fully aware of what they are, their rules, and how they work. In this blog, we are going to provide you with an introduction to ISAs to improve your understanding of them and most importantly, how to take advantage of this tax-free way of saving.

What is an ISA?

Individuals Saving Accounts or ISAs as they are also known, have been available in the UK since 1999 and were introduced by the government to encourage people to save money. During the current tax year of 2021/22, you can put as much as £20,000 into an ISA, tax-free and this can include cash, investments or both.

How Do ISAs Work?

There are a number of different ISAs available but they all share one thing – they offer tax-relief. This will include any interest that you earn from cash or on any returns from investment such as stocks and shares.

There are different types of savers and so, there are different types of ISAs available. What this means is that you might see better returns from a Stocks and Shares ISA but that comes with the risk of losing money. So, if you are not happy with the risk of your money going up or down, then a Cash ISA might be the better option.

However, you don’t have to decide between a Cash ISA or an Investment ISA. This is because you can put your money in a range of different ISAs, although there are some rules that have to be followed.

• It is not possible to invest in more than one of the same type of ISA. There, you can have a Stocks and Shares ISA as well as a Cash ISA but you cannot have two Cash ISAs.
• Across all of your ISAs, you have a limit of £20,000 and it is not possible to use several ISAs to invest more money.

The Different Types of ISAs

Cash ISA

This is a simple ISA that enables you to earn tax-free interest on savings of up to £20,000.

Stocks and Shares ISA

You might see higher returns with this type of ISA although the value of investments can also drop. You can choose up to £20,000 of stocks, bonds and other financial securities.

Junior ISA

This type of ISA is designed for individuals under the age of 18. The limit for Junior ISAs in 2021-22 is £9,000, and this is set to remain the same in 2022-23. A Junior ISA can include a Cash or a Stocks and Shares ISA. The child won’t be able to access the money until they are 18 as it is held in trust. However, when the child reaches age 16, they can take over the management of the ISA, therefore enabling them to have a taste of investing.

Lifetime ISA

This one is relatively new but it is designed for those who want to save for retirement or a first home. They are only for people aged between 18 and 40, although you can pay into them until you are 50. If the ISA is being used for the purchase of a first home, then the property has to be worth less than £450,000. Furthermore, the government will also give you 25% of what you pay in although the amount you can save each year is £4,000 and that will be deducted from your ISA allowance of £20,000.

Innovative Lifetime ISA

Much like a Stocks and Shares ISA, you can invest up to £20,000 with all returns being tax-free. The difference is that the returns are made from peer-to-peer lending. This means that willing lenders are matched with suitable borrowers so you will be lending to businesses and people without the use of a bank. Therefore, the interest rate will be higher although the level of risk is higher as your investment can decrease.

Exiting Your ISA – Is It Possible?

It is possible to take out your money at any point and if you leave the account open and have a flexible ISA, you can also put your money back into it. However, if you remove your money and then close the account, you won’t be able to open another ISA until the next tax year. It is possible to close a Cash ISA and then open a Stocks and Shares ISA but you won’t be able to open another Cash ISA. Any tax-free interest that you earned before withdrawing your money will still be tax-free.

If you feel as though your ISA is not performing as you expected, then you can also move your savings to another. So, this would mean that you can transfer money from one Cash ISA into another Cash ISA as you won’t be closing the account down. One thing to consider is that different companies will have different rules when withdrawing, so make sure you read the terms and conditions.

Capital at risk.