Saving money is a confusing subject for many people, with terms like ISAs and varying interest rates proving difficult to wrap your head around. With endless options of bank accounts out there, we’ve simplified exactly what ISAs mean and how much you can put in one. Individual Savings Accounts are everywhere you look nowadays, and lockdown has certainly got a lot of people in the saving mindset, using the money saved through working from home to put into investments or different bank accounts.
What is an ISA?
ISA stands for individual savings account, which actually sounds a lot more complex than it is.
This means it is a savings or an investment account which you don’t have to pay any tax on.
Each tax year, you get an ISA allowance which sets the maximum you can save within the tax-free bracket.
Typically, this maximum is £20,000 – but how it’s saved, charged and so on can vary a lot depending on which account you’ve gone for.
There are five different kinds of ISAs you can have, and they all work slightly differently.
What are the different types of ISAs and how much can you save in one?
If you’re using a standard savings account (not an ISA) and have large amounts of savings, you may have to pay tax on the interest if you go over your personal savings allowance.
This is usually £1,000 in interest for basic-rate taxpayers or £500 for higher-rate, but with a cash ISA, you pay no interest whatsoever.
Plus, any interest you earn in a cash ISA doesn’t count towards your personal savings allowance, so if you earn a lot of interest you can protect it.
Stocks & shares ISA
It’s possible to use an ISA to invest your money, these are called the stocks and shares ISAs.
If you have one of these, you can invest in funds (shares or bonds from various companies pooled into one investment), bonds (basically a loan to a company or a government), and shares in individual companies.
With an S&S ISA, you’ll also usually have to pay a few different fees, such as:
Platform charge – This can either be a flat fee or a percentage of the value of your funds.
Annual management charge – This is the charge by the actual manager of the fund held within your stocks & shares ISA.
Trading fees – This is the cost every time you buy or sell shares or funds, which can be anything from £0 to £25.
Transfer out fee – The cost involved in moving your stocks & shares ISA from one platform to another, often around £25 to £50, though some platforms don’t charge it.
Lifetime ISA (LISA)
Lifetime ISAs were launched in 2017 to help people save for their first home, or for retirement, offering a whopping 25 percent bonus on your savings.
However, you have a £4,000 limit each tax year.
So, while you can put the full £20,000 allowance into a cash ISA, a stocks & shares ISA or an innovative finance ISA, here you’re limited to £4,000. There are two different types of Lifetime ISAs, which are Cash Lifetime ISAs and Stocks & Shares Lifetime ISA.
A Lifetime ISA is usually the best bet when you’re saving for retirement, or buying your first home, and you are much better off starting the account when either your retirement or the purchasing of your first home is a long way off.
You can save the £4,000 as a lump sum or by putting in cash when you can, then the state will add a 25 percent bonus on top each month you’ve saved something.
For example, if you save £2,000 you’ll have £2,500 and if you save the full £4,000 each year, the bonus will take it up to £5,000, before any additional interest is added.
You can only open a LISA if you’re aged 18 to 39 and can only withdraw cash if you’re buying your first home or you’re 60 or over. You face a huge penalty if you do.
Innovative finance ISA (IFISA)
Also known as peer-to-peer lending, this account means the company offering the IFISA will use your money to lend to borrowers or businesses and you’ll gain interest for lending your money out.
Lending through an IFISA means your interest isn’t taxed, but you may lose money if the people you’ve lent to can’t repay.
It can also take a while to get your money back if you want to withdraw because you often need to wait until other investors are there to buy you out of your loan.
Junior ISA (JISA)
There’s a version of the ISA for children, called a junior ISA (JISA) and just like the adult savings account, it allows you to save tax-free, on behalf of a child.
You can save up to £9,000 a year into a JISA, which is less than a half of the adult ISA allowance, but it is completely separate from your own savings allowance, meaning you can save £20,000 a year in your personal ISA, plus another £9k into a child’s.
Children can’t touch the JISA until they turn 18, despite the account being held in their name.
They can control the account at age 16, but cannot access the money until their 18th birthday.