Let’s reply to the question on ISAs
What’s an ISA?
ISA stands for Individual Savings Accounts. The biggest difference between an ISA and any other savings account is it’s a legal tax loophole! You can save and invest your money without being taxed. This means an ISA account offers tax-free interest payments, so you can get more for your money.
The best ISA depends on what you are looking for. There are four types of ISA:
- Cash ISAs
This works similarly to a bank account. A Cash ISA is likely to pay you more interest than a bank account would on your pot of money that is sitting and waiting for you. There are two options available: fixed-rate and instant access.
Fixed-Rate: These types of accounts lock your money away for a set period of time (e.g. 5 years) in return for a higher interest rate.
Instant Access: These types of accounts are flexible and allow you to make money in and out whenever you want. It is likely to come with a better interest rate than a bank account, however, it will not be as good as Fixed Rate Cash ISA.
Cash ISAs can be opened with as little as £1. However, it is important to take note that you can only have one active cash ISA annually. This type of ISA is protected by the Financial Services Compensation Scheme (FSCS.)
- Stocks & Shares ISAs📈
If you are looking to begin investing long-term (5 or so years), this is something you should look into getting. A stocks and shares ISA can help you beat inflation and help you build a nest egg for future financial goals.
Imagine not having to pay any tax on your dividends, growth, interest, or income you get from the investments! However, you can only open one stocks and shares ISA with one ISA provider in a tax year.
If you are new to investing, then a robo-advisor may be a good place for you to begin your journey. Platforms such as Nutmeg make it super easy to sign up for a Stocks & Shares ISA! This type of ISA is protected by the FSCS.
Check out this article on the best investment platforms to try out in 2021.
- Innovative Finance:confetti_ball:
This type of ISAs are peer to peer lending. This means that you lend money to people and companies. In return, they pay you back with interest; this interest is usually higher than what you would earn on a Cash ISA. It is important to take note that this type of ISA is high risk.
It is also important to take note that this type of ISA is not protected by the FSCS.
- Junior ISA
If you are looking to put away some money for your children, a junior ISA is a great way to do it. A junior ISA allows you to save and invest up to £9,000 annually…tax free. This is a great way to start saving money for your kid until they reach the age of 18. Platforms such as Hargreaves Lansdown and Nutmeg handle Junior Cash ISA and Junior Stocks and Shares ISA versions.
- Lifetime ISA
If you are looking to buy your first home (costing no more than £450,000 or for retirement after the age of 60, this is for you. You can invest up to £4,000 annually and the government will give you a 25% bonus on top of any contributions made. What does this mean? This means you can potentially earn up to £1,000 annually FOR FREE.
However, if you choose to withdraw for any reason apart from terminal illness or death, a penalty charge of 25% of the value withdrawn will apply.
Remember, you can only open a lifetime ISA if you are under the age of 40. Lifetime ISAs can be available as both Cash or Stocks & Shares ISA. This type of ISA is protected by the FSCS.
I hope this answers your queries on what an ISA is and what ISA would be best to get. If you have some savings but are unsure where to put your money, an ISA is a great start. Remember to understand what are your financial goals in order to pick the right type of ISA for you. Cheers!
Let us know what are your thoughts on ISAs, do you have one? Which one do you have and why?