Individual Savings Account (ISA)

There are 4 types of ISA:

• cash ISAs
• stocks and shares ISAs
• innovative finance ISAs, and
• lifetime ISAs.

Cash ISA

Cash ISAs are tax-free savings accounts meaning you do not pay tax on any interest earned. This is typically a much safer approach, as the other types are vulnerable to market volatility, whereas a cash ISA only goes up due to interest accrued. However, if inflation creeps higher than interest rates, the real value of cash decreases, so technically it is possible to end up with less money than you put in.

Different types of cash ISAs offer different ways to access your money. These can include:

• Instant Cash – Where you can put money in and take your money out whenever you need to.
• Limited access – Where you can only take your money out a certain number of times. If you go over this withdrawal limit, your interest rate will drop.
• Fixed rate – Where you lock away your money for a fixed term, knowing that your interest rate won’t change.

You can only have one ‘active’ cash ISA every year. This means that you can’t open multiple cash ISAs in a single tax year and benefit from the tax-free savings allowance in each of these cash ISAs.

Stocks and Share ISA

Stocks and Share ISA is often used by investors to reap tax-free gains on capital gains. This includes profits on transactions, dividends, and income. You can pay a total of £20,000 a year into ISAs each tax year. Whenever you need your money, you can withdraw it.

A stocks and shares ISA could be for you if:

• you are happy to put your money into investments funds for long term savings with tax free growth
• you aren’t looking for immediate access to your money and are prepared to keep your money invested for a number of years, you haven’t used up your total ISA allowance for the current tax year.
• you’re comfortable with the fact that the value of your investments can go both up and down and that you might get back less than you invested.

Stocks and Share ISA can be invested in

• unit trusts
• investment trusts
• exchange-traded funds -ETF
• UK stocks and shares
• International Shares
• corporate and government bonds
• OEICs (Open Ended Investment Companies)

Innovative Finance ISA – IFISA

An innovative finance ISA (IFISA) lets you use your tax-free ISA allowance while investing in peer-to-peer lending.  

IFISA was introduced in April 2016 after a boom in peer-to-peer lending. It’s basically a tax-wrapper for various types of new and innovative investments.

IFISA can include

• Peer-to-peer loans
• Crowdfunding investments

From 6 April 2024, IFISAs can also include Long-Term Asset Funds, which invest in long-term projects such as property and infrastructure developments, and open-ended property funds.

You can’t transfer any peer-to-peer loans you’ve already made or crowdfunding investments you already hold into an Innovative Finance ISA.

What is peer-to-peer lending

Peer-to-peer lending is where individuals lend money to other people, property developers or businesses, without a bank as the intermediary. Instead, borrowers and lenders are matched using online platforms. These investments tend to offer higher returns than cash savings – but they can be quite risky.

What is crowdfunding

Crowdfunding is a way for start-ups or growing companies to raise money to finance projects and run their companies. It enables fundraisers to collect money from a large number of people via online platforms. 

Lifetime ISA – LISA

A Lifetime ISA (LISA) is a type of savings account that was designed specifically for people aged 18-39 who are saving for their first home or retirement. Saving into a Lifetime ISA can give your money a boost because the government adds to your savings, but there are rules around withdrawing your money that you need to know about too.

Important facts about LISA

• You can open a LISA if you’re aged 18 to 39, and save up to £4,000 tax-free each year, up to and including the day before your 50th birthday
• the government pays a 25% bonus on top of your contributions up to a maximum of £1,000 a year
• your £4,000 Lifetime ISA allowance forms part of your overall £20,000 annual ISA allowance
• If you pay in your full allowance each year between the ages of 18 and 49, you can gain a total bonus of up to £32,000.
• If you die, any money in your Lifetime ISA, including interest and bonuses, is passed on to your beneficiaries without penalty. But it will lose the ISA tax-free status and will form part of your estate for Inheritance Tax purposes.

Withdrawing money from LISA  

You can access money in your Lifetime ISA, including the government bonus and without paying any tax, if:

• The savings and bonus can be accessed tax-free, without penalty, once you’ve turned 60 years old
• You are diagnosed with a terminal illness
• You can withdraw from your LISA after 12 months from your first payment in to buy a house with a purchase price of up to £450,000. Accounts are limited to one per person rather than one per home – so 2 first-time buyers can both receive a bonus when buying together.
• For any other withdrawals before the age of 60, a 25% government withdrawal charge applies, meaning you’d get back less than you paid in.