Individual Savings Accounts (ISAs) can be a good way to put money away and save, as well as invest and grow your finances. ISAs are safe from income or capital gains tax, so your profits are all yours.

One person can deposit up to £20,000 tax-fee into ISAs each tax year. That could be all into one ISA, or split between any of the four different types: cash ISA, stocks and shares ISA, innovative finance ISA and lifetime ISA.

There are some rules:

• Unused allowance doesn’t roll over
• You can’t pay into more than one of the same type of ISA in a year.

Now is the best time to make the most of your allowance before the tax year ends 5^th of April.

The different types of ISAs can be confusing, so we’ve put together a quick guide to help you choose the ISA that is right for you.

1.  Cash ISA

Cash ISAs function like most savings accounts – your money goes in and earns interest. Your money is safe and will never lose value, but the interest you can get will vary.

Due to the personal savings allowance, most UK taxpayers no longer pay any tax on their savings. Basic 20% rate taxpayers can gain up to £1,000 interest a year without paying tax, while higher 40% rate taxpayers can earn up to £500 before paying tax.

This means that the best choice for a savings account may be the one with the best interest rates, which won’t always be an ISA.

However, there can still be benefits to cash ISAs, particularly if you’re a big saver or higher earner. Due to the yearly limit, you might benefit from putting money in a cash ISA now to gain more benefits from interest rate rises that could happen in the future.

Many ISAs are also more flexible than other savings accounts, allowing you to withdraw money and repay it without affecting your allowance. This isn’t currently a requirement, though, so be sure to check with your provider.

Types of Cash ISA:

• Easy-access cash ISAs allow you to access your money whenever you need it.
• Notice cash ISA will require you to give a few days’ notice to access your money and in return usually offer higher interest rates.
• Fixed term cash ISAs will offer higher interest rates that won’t change over a fixed period of time, but you’ll have to pay a fee for withdrawing early.
• Regular saver ISAs offer a fixed rate as long as you make a regular deposit each month and don’t withdraw your cash.
  

2. Stocks & Shares ISA

Stocks and shares ISAs can be an efficient way to invest your money in shares, funds, investment trusts and bonds. They carry permanent exemptions from capital gains tax, bond interest and tax on dividend income.

While cash ISAs protect your money, a stocks and shares ISA is a risk-based investment that can see values rise and fall. That means, while you may get much more out than you would from an interest rate on a cash ISA, you may leave with less.

You should put money away in a stocks and shares ISA for a minimum of five years to smooth out any ups and downs. You should also be prepared to pay a few different fees, for example for using a platform or each time you buy or sell shares or funds.

3. Innovative finance ISA

Innovative finance ISAs offer peer-to-peer loans, matching investors up to individuals, business or property developers that are looking to bring you a return on your money.

This is likely to bring you bigger returns if it pays off, but your money is more at risk.

Unlike stocks and shares ISAs, if the platform collapses, your money isn’t protected by the Financial Services Compensation Scheme.

Stricter rules on who can invest in innovative finance ISAs were brought in in 2019, so this can be a good option for more experienced investors who are clear on the risks.

4. Lifetime ISA

Lifetime ISAs are designed to help under-40s save for retirement or a first home with the help of the government.

Savings are topped up by 25% every year (with a maximum input of £4000 annually). You have to be 18-39 to open a lifetime ISA, and you receive the bonus every year you pay in. You can only pay into your ISA until the day before your 50^th birthday.

So, if you open one at 18 and save the maximum amount every year until you’re 50, you’ll get a bonus of £33,000.

Of course, there are limitations. If you withdraw your money before the age of 60, and you’re not using it to buy your first home, you’ll pay a 25% penalty.

Choosing an ISA

It’s crucial to find the ISA or other savings or investment account that’s right for you and your finances. Every individual has unique financial circumstances, and the type of ISA that’s right for you will depend on your financial situation.

Below are some of the main things you need to consider:

• How much and how often you want to save or invest. An effective budget is crucial for tracking how much you can put away each month.
  
  
• How much and how often you might want to withdraw from your savings. For example, your emergency fund should be accessible and safe from drops in value. One good rule of thumb is to have at least three months living expenses in accessible savings, but you may choose more to for extra peace of mind.
  
  
•  How comfortable you are with risk. The most personal choice there is. It’s natural to be hesitant about risking your hard-earned money when it might not pay off. Diversifying your investment into different types of ISA can be a great way to give you both confidence and opportunity for growth.

ISAs are a common way to save and invest due to the tax benefits that they bring. They can seem scary, but knowing your way around the different types ensures you can get the most from your finances.

For personalised advice on managing your savings and investments, get in touch or call 0121 285 8528 to talk with our team.

Disclaimer: The value of your investments can go down as well as up, so you could get back less than you invested.

 

image source: https://pixabay.com/photos/money-grow-interest-save-invest-1604921/