JISA, LISA, cash ISA, stocks & shares ISA, IFISAs… Confused?
In the face of all these acronyms, I am not surprised!
Having previously made the mistake of assuming that everyone was well accustomed to finance abbreviations, I am going to shed some light on this jargon. So before going any further let me clarify, I am not referring to my favourite Auntie Lisa!
Essentially, I am referring to the number of different Individual Savings Accounts (ISAs) that are available to put your money in, which shows how ISAs have evolved from the original incarnation of the Personal Equity Plan (PEP).
So how do you know which ISA is the appropriate one for you to use?
That would depend on some of the following factors:
- how old you are
- which asset classes you would like to invest in
- how long you would like to invest your money for
- your risk profile
Let me elaborate.
For example, a Junior ISA (JISA) is for those under the age of 18 and comes with an annual subscription limit of £9,000. As with adult ISAs, JISAs can come in the form of cash or stocks and shares accounts, but importantly they belong to the child and will become accessible to them from their 18th birthday.
Turning to the Lifetime ISA (LISA), this was introduced from 6 April 2017 as a more flexible way to save for first home purchases and retirement. Importantly, they can only be opened by those between the ages of 18 and 40, so if this milestone has passed and you have not already opened a LISA, breathe a sigh of relief as you have just narrowed down the choice of ISA accounts from which you can choose! If you have an account though, you can continue to add to it until your 50th birthday.
The standout feature of a LISA is that the Government provides a 25% bonus, which is capped by the lower subscription limit of £4,000 on these accounts. The catch? You can only access the funds on purchase of your first home, upon reaching age 60 or upon diagnosis of a terminal illness. Early access for any other reason is penalised via a withdrawal charge of 25%.
For those aged 40 and above, who have patiently read to this point … through the process of elimination you will have no doubt guessed that a cash or stocks and shares ISA is your starting point. That is not to say that those below 40 cannot use these accounts as they are available for anyone above the age of 16 (cash ISA) or 18 (stocks and shares ISA), who may wish to have greater flexibility in terms of accessing their funds.
Just a little nugget … you may find it interesting to know that a 16-year-old can make use of both their JISA limit (£9,000) and their adult cash ISA limit (£20,000).
Essentially a cash ISA and stocks and shares ISA are very similar in that an individual can invest £20,000 per tax year, noting that if you are fully funding your LISA, your remaining ISA entitlement for the year will be £16,000, still following?
The differentiating factor? You guessed it; the clue is in the name. If you want to keep your funds in cash, the cash ISA is for you. But if you want to invest in other asset classes – equities, property, fixed interest, real assets – you will need to open a stocks and shares ISA.
To round off the type of products to be found within the ISA family there are innovative finance ISAs (IFISAs) that essentially enable the investor to use their ISA allowance to invest in peer-to-peer lending. As this type of ISA begins to gain attraction, Mattioli Woods will be looking to provide an offering for our clients in the coming months.
In summary, an ISA (in whatever form) is simply a tax wrapper that enables you to hold your investments in such a way that the returns and income they pay are free from tax. How you choose to invest the money will dictate what sort of ISA you require.
And if you are thinking that you might want to utilise multiple types of ISAs that is absolutely fine too! As long as you do not exceed your annual allowance, you can put money into each type of ISA that you are eligible to open.
And if you choose to alter your investment strategy? Never fear, ISAs are flexible so you can not only transfer between providers (such as banks / building societies / investment houses / platforms) but also switch your funds between cash ISAs, stocks and shares ISAs, and IFISAs.
This article has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods plc and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns. Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.