With the March 2021 Budget announcing a freeze on the lifetime allowance for pensions, many savers and investors are considering ISAs (individual savings accounts) as a supplementary savings vehicle. In this guide, our financial planning team here at Vesta Wealth offers an overview of different ISA types, and how they can be used in a financial plan.
How ISAs work
ISAs were introduced on 6th April 1999; their purpose is to incentivise people to save by offering a tax-efficient way to grow their wealth. The money you put in can be held either in cash or in other assets (e.g. stocks). Any interest, profits or dividends is then exempt from tax.
The rules have changed over the years, so that there is now a type of ISA for everybody. A Lifetime lSA, for example, may be suitable for a younger person seeking to get onto the property ladder. An Innovative Finance ISA may be best for a wealthier investor, willing to take on higher investment risk for the chance of more promising returns.
Remember that you can put up to £20,000 per tax year into your ISAs, and if you are doing this before 5th April 2021, you will have another allowance which starts on 6th April 2021.
Below, we explain each of the main types in more detail.
Cash ISAs
Perhaps the simplest type of ISA, a Cash ISA acts very much like a savings account at your local high street bank. The main difference is that any interest generated on the cash will be exempt from tax. You can opt either for an instant access account, where money can be taken out quickly, or a fixed-rate version, where your cash is locked away (e.g. 2 years) in exchange for a higher interest rate.
A Cash ISA is not always the best option for cash savers. Most people already have a Personal Savings Allowance (PSA) which allows you to generate up to £1,000 per tax year in interest without attracting tax (£500 for higher rate taxpayers). Secondly, Cash ISAs do not always offer a better interest rate compared to deals offered by regular savings accounts. However, a Cash ISA can be great for certain people e.g. those on the additional rate (45%), since they have no PSA.
Stocks and Shares ISAs
These are sometimes called investment or equity ISAs, since they allow you to put your money into the likes of stocks, bonds and property investments. Any growth will be exempt from income tax or capital gains tax (CGT). However, not all providers of ISAs offer a wide range of investment options, perhaps limiting you, say, to three ready-made portfolios. Moreover, you will typically need to pay a fee to put your money into a Stocks & Shares ISA (e.g. platform fee).
Lifetime ISAs
This can be a compelling option for first-time buyers, since the UK government will add 25% to anything you put into it. You can commit up to £4,000 per tax year, which means a £1,000 top up from the government. This is a nice boost in addition to any investment growth your account also generates. You can open a Lifetime ISA anytime between age 18 to 39 and can continue paying in until you reach 50. There are restrictions to consider, however. First of all, the money can only be used to buy a property worth less than £450,000. Secondly, you must wait at least 12 months after opening a LISA before you can use the money.
Innovative Finance ISAs
If you like the idea of peer-to-peer lending (P2P) and want to invest in startups, then Innovative Finance ISAs allow you to do so in a tax-efficient way. This approach involves lending money to businesses on the condition that they pay you back, with interest paid tax-free, due to the ISA investment wrapper. The interest rates on offer will likely make the likes of Cash ISAs appear small, yet this does come with the risk that the money may not be repaid (e.g. if the business you invest in fails). Make sure you weigh that risk with your Financial Planner and that any P2P lending you wish to engage in falls within your investment goals, strategy and risk appetite.
Junior ISAs
Looking to put money aside tax-efficiently for your children? From tax year 2020-21, you can save up to £9,000 per tax year into a Junior ISA on behalf of your child, provided they live in the UK and are under age 18. The money belongs to your son/daughter, but they cannot access it until they turn 18. This can be a handy, tax-efficient way to help them save for a house deposit or for the cost of university. The money can be invested either in cash (i.e. a Junior Cash ISA) or in assets to generate investment growth (i.e. a Stocks & Shares Junior ISA).
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.