If you’re currently on the hunt for a simple, tax-efficient way to grow your money pot, then a stocks and shares ISA is probably for you. Yet, with so many ISAs to pick and choose from, how do you know which is the best choice for you? Here are five things to look out for when finding the right ISA.
Unraveling the world of individual savings accounts (ISAs)
The world of ISAs used to be fairly simple; stocks and shares or cash accounts, with your allowance, capped for both options. Fast forward to 2019 and there are now four different established ISA brands to pick and choose from.
With so many recent changes to keep track of within the ISA system, many people are struggling to understand the new rules.
An over-abundance of ISA options
With Lifetime ISAs, cash ISAs, Help to Buy ISAs and Innovative Finance ISAs to pick and choose from, knowing which is the one is the one for you can be very tricky.
When it comes to picking the right ISA for you just remember that the premise of any ISA is the same (and is super simple) – it’s a tax-free account where you are able to shelter investments or savings. The best thing about an ISA is that the taxman can’t touch any of the returns!
This is still the most popular ISA and is by far the easiest to understand. With this type of ISA, cash goes in and cash plus interest comes back out. Cash ISAs are as simple as setting up a standard savings account and you can opt for an easy access account, a regular saver option or a fixed-rate bond.
This is a good choice for anyone looking for a limited risk option who want to know exactly how much money they have in the bank at any one time. As long as you pick an option that offers instant access to your cash, it can also be a great place to store your rainy-day fund.
Stocks and shares ISA
Another popular ISA choice is a stocks and shares ISA. You may not know this, but it is also possible to invest in bonds, funds, and shares – and still keep any profits in a handy tax-free wrapper. This means you won’t have to worry about any pesky capital gains tax on any profits you may make.
You typically open a stocks and shares ISA via a fund management group or online broker. Well-established players within the UK market include mutuals like Scottish Friendly who offer a number of straightforward ISA options. Their My Easy Choice ISA is super easy to use as you will be investing in just one single fund. You can find lots of helpful tips and tricks on their, Facebook, Twitter, LinkedIn, and Youtube channels. This ISA option starts at just £10 a month, making it an extremely affordable budget option for people looking for tax-free growth potential. Even better, existing Scottish Friendly members can also access all of their plans on the go with their intuitive app. You can download the Smartphone app here.
Innovative Finance ISA
A lot of people are now investing money into new peer-to-peer lending opportunities via websites such as Ratesetter and Zopa, with a number of these platforms offering better returns than the traditional savings market. This type of ISA is best for people who already have a strong working knowledge of the peer-to-peer lending market and are already aware of the risks involved in this investment opportunity.
Help to Buy ISA
This type of cash ISA was specifically designed to help first-time buyers get onto the property ladder. This ISA can be used to help save a deposit for your first time and can be used to help purchase a property worth up to £250,000 (or £450,000 if you are looking to buy in London).
With this option, it’s important to remember that this type of ISA acts like a regular saver account and you are only able to pay in £200 a month into this type of account. You are able to add £1,200 in your first month, so make sure to maximize this opportunity!
When you use this money to buy your very first home the government will top up your savings with a maximum 25% bonus, up to £3,000. Top tip: to get the most out of this saving opportunity, you’ll need to save the maximum amount for over 4 years.
A help to buy ISA is always a good idea if you’re currently saving for your first home.
This is one of the newer ISA offerings on the block and is another account that offers a handy free government top-up. With a LISA, you’ll be able to pay into one Lifetime ISA each tax year. You can open a LISA if you are aged between 18 and 39 and have the option to save up to £3,000 each year. You can continue to save every year until you turn 50. The government will provide an annual 25% top-up which is capped at £1,000 per year.
It’s worth noting that this new ISA comes with a pretty hefty health warning as you won’t be able to access these tax-free funds until you hit 60. If you want to access these funds earlier, you will incur a penalty.
We hope this guide has given you a clearer understanding of the different types of ISAs available and which option will be the best fit for your investment needs.