When looking at ways to save money, it can be a little confusing, and given all the acronyms; JISA, LISA, cash ISA, stocks & shares ISA and IFISAs, I’m not surprised!
So, what is an individual savings account (ISA) and how do you know which is the appropriate one for you to use? Well in summary, an ISA (in whatever form) is simply a tax wrapper that enables you to hold your money in such a way that the returns and income it generates are free from tax. How you choose to invest the money will dictate what sort of ISA you require, which might depend on some of the following factors:
- • how old you are
- • how long you would like to invest your money for
- • your risk profile
- • which asset classes you would like to invest in
Let me explain.
If you are looking to save for a child’s future, a junior ISA (JISA) is ideal. Created specifically for those under the age of 18, a JISA comes with an annual subscription limit of £9,000. As with adult ISAs, JISAs can be held in cash or invested in stocks and shares accounts, but importantly they belong to the child and will become accessible to them from their 18th birthday.
Lifetime ISAs (LISAs) were introduced on 6 April 2017 as a more flexible way to save for first home purchases and retirement. 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 ISAs from which you can choose! If you already 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, once you have reached age 60, or upon diagnosis of a terminal illness. Early access for any other reason is penalised with a withdrawal charge of 25%.
If you are aged 40 or over, your choices are quite simple. 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. Interestingly, a 16-year-old can make use of both their JISA limit (£9,000) and their adult cash ISA limit (£20,000).
Essentially, cash ISAs and stocks and shares ISAs 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.
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 such as equities and fixed interest – 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.
If you are thinking that you might want to utilise multiple types of ISAs, that is absolutely fine. As long as overall you do not exceed your annual subscription allowance, you can put money into each type of ISA you are eligible to open, subject to only being able to invest with one ISA provider per ISA type, per tax year.
What 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 or platforms) but also switch your funds between cash ISAs, stocks and shares ISAs, and IFISAs.