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ISAs Explained

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What are ISAs?

An Individual Savings Account, or ISA, is a tax-efficient way to save or invest your money.  You don’t pay Capital Gains Tax or Income Tax on any of the money you earn. This means any interest or returns you make will remain yours, so you get to keep more of your money rather than paying it to the tax man.

WHO CAN HAVE AN ISA?

UK residents aged 16 or over can save up to £20,000 in a Cash ISA. UK residents over 18, can save in a Cash or a Stocks and Shares ISA or a combination of ISAs, as long as the contributions made, do not exceed the annual ISA allowance.  

What is the ISA limit for 2019/20?

The current ISA limit is £20,000 for 2019/20 (subject to change) and it’s been this amount for two years. The ISA allowance is always announced before the new tax year, which starts on the 6th April, and you have until the 5th April the following year to use your allowance, so make sure you make the most of it before the deadline passes.

You can invest in any type of ISA, as long as your combined contributions don’t exceed the annual ISA allowance for each ISA type.

You may hear an ISA being referred to as a tax wrapper. This is because it can incorporate a number of different tax-efficient products and you can only have one of each ISA product during each tax year.

In the simplest terms, think of an ISA as a box of Celebrations! You have a number of different chocolate options to choose from. They’re all chocolate, but they each have their own unique qualities and you can only have so many chocolates in a box!

What types of isa are there?

There are six main ISA types you can choose from. The six different types are:

Cash ISA

Cash ISAs are similar to a savings account and come with a variety of different options, like instant access and fixed interest. These are ideal if you want to save for a rainy day and you want to keep your money safe, as your money is protected up to £85,000 with the Financial Services Compensation Scheme (FSCS). 

Stocks and Shares ISA

A Stocks and Shares ISA allows you to invest your money into the stock market where you can purchase shares, investment funds and bonds to name but a few. You could do this yourself or you could get an online broker or investment platform like Wealthify to do this for you. There is more risk when it comes to investing in the stock markets because prices can go down as well as up and you may get back less than you invested. 

Although we cannot rely on past experience, a 2015 Barclays study found that over any 10-year period in the past 115 years, shares have performed better than cash 90% of the time1.

Investing in a Stocks and Shares ISA could help you to achieve you long term goals and because of this it shouldn’t be used as a short-term savings account.

A Stocks and Shares ISA is not for everyone, which is why, when you apply for a Wealthify Investment Plan you’re asked a few suitability questions to make sure that investing is for you.

If you have multiple financial goals, you could open more than one ISA Plan with Wealthify to separate your investments. They could also have different investment styles.  For example, you could have three Wealthify ISAs, one for your first house with a medium investment style, one for boosting your retirement fund with a higher risk investment style, and another for a once-in a life time trip you want to plan in five years’ time with a lower investment style as you don’t want to take as much risk. 

As long as your personal circumstances allow you to invest in higher risk plans, you can choose exactly how you invest your money and you can even do it ethically too.

If you invested after the 1st April 2019, any money you hold in a Stocks and Shares ISA is protected under the FSCS up to £85,000. If you invested before the 1st April, the FSCS will cover up to £50,000.   

Junior ISA

A Junior ISA has its own ISA allowance which is currently £4,368. A parent or guardian can set up a Junior ISA for their child, as long as the child is a UK resident, they’re under 18 and they don’t already have a Child Trust Fund. Like an adult ISA, a child can have both a Junior Cash ISA and a Junior Stocks and Shares ISA but they cannot have more than one of each type.  

With an ISA, you can open a new one every tax year, but with a Junior ISA, if you wanted to open a new one, the old one would need to be transferred and closed.

What are the benefits of a Junior ISA?
The Junior ISA works in the same way as an adult ISA, but as soon as the money is deposited into a Junior ISA, it will automatically belong to the child. The child will only be able to withdraw from their Junior ISA when they turn 18, when it matures into an ‘adult’ ISA. Which means there’s no opportunity for you to dip into it, even if you need emergency funds. This could be a positive or a negative, depending on your circumstances. 

As with an ‘adult’ ISA, you can have a Junior Cash ISA, a Junior Stocks and Shares ISA or a combination of the both as long as the contributions don’t go over the year’s annual allowance. 

Anything you pay into a Junior ISA doesn’t count towards your own personal £20,000 limit, so you can save this for your child on top of your own tax-efficient savings. 

What is a Child Trust Fund?
Junior ISAs replaced Child Trust Funds (CTF) in 2011, but they were long-term savings or investment accounts created for all children. Everyone born in the UK between 1st September 2002 and 2nd January 2011 got £50 to £1,000 free from the Government to save in a Child Trust Fund, so, if your child was born between these dates, they probably have one.   

If you’d like to transfer your CTF to a Wealthify Junior ISA, you can do this easily with Wealthify using our simple transfer process. 

If you do choose to transfer either an existing Junior ISA or Child Trust Fund, you need to make sure all of the child’s details are up to date before completing any transfer forms.  For example, if the child has changed their name or address and this hasn’t been updated, the transfer will be rejected, and you’d need to start the process again. 

Help to buy ISA

If you’re a first-time buyer, then a Help to Buy ISA could be for you as the government will very nicely top-up your balance by 25%. You’ll need to be quick if you haven’t already got one, as Help to Buy ISAs won’t be available after 30th November 2019. If you already have one, you can continue to pay into it, up until 30th November 2029 – So you have some time to save

In the first year, you can invest up to £3,400 and each subsequent year up to £2,400.

You’ll need to invest a minimum of £1,600 to take advance of the Help to Buy ISA which would give you a bonus of £400.

The maximum amount you can save in a Help to Buy ISA is £12,000 giving you a £3,000 bonus.

You won’t get the bonus to pay towards your mortgage deposit, but it will go towards the total cost of the property once the sale is completed which means your mortgage will be reduced. 

If both you and a partner are first-time buyers, you can both individually benefit from a Help to Buy ISA. But if you choose not to buy a property, you won’t be able to claim the extra 25%. 

Although you can have multiple ISAs of different types during each tax year, you cannot have a Cash ISA and a Help to Buy ISA at the same time.

 

Lifetime ISA

This type of ISA can only be opened by savers between 18 and 39, and contributions can only be made up until the age of 50! It’s similar to a Help to Buy ISA, but you can only invest up to £4,000 each tax year. You could earn up to £1,000 each year to boost your savings pot as the government will top-up your Lifetime ISA with 25%. If you choose to invest the full £4,000 in a Lifetime ISA this leaves you with £16,000 to invest into the other ISA options.

Money held in a Lifetime ISA must be used to either buy your first property, or if you’re already a homeowner, you’ll need to wait until you’re 60 and use it to boost your retirement fund.  

To make things a little bit more complicated (even though we are trying to simplify it) – you can have both a Cash Lifetime ISA and a Stocks and Shares Lifetime ISA within the £4,000 allowance and you can also have a Stocks and Shares ISA too.

Innovative finance ISA

This is the youngest in the ISA world as it’s relatively new, launched in April 2016.  This allows you to make peer-to-peer lending investments within the tax wrapper. You can invest the full £20,000 allowance into an Innovative Finance ISA also known as an IFISA.

What is peer-to-peer (P2P) lending?

Peer-to-peer lending platforms bring people together who’d like to invest money with prospective borrowers who are looking for a loan. This can be a good option if you’re open to a little more risk, but you can decide upfront how much you want to lend and how long for. P2P platforms can match you with a borrow that suits your terms and they manage it for you. 

Once you’ve been matched with a borrower and the money is lent, you will start to earn interest and depending on the platform you use, you could either take the interest as income or reinvest it automatically into your Innovative Finance ISA to try and maximise your returns.

 

How much money can you save in an ISA?


As a recap, your ‘tax wrapper’ ISA allowance (which can change each year) is currently £20,000 and you can split it between the following ISA products: 

ISA Yearly limit
Cash ISA Up to £20,000
Stocks and Shares ISA Up to £20,000
Junior ISA (JISA) Up to £4,368*  
Lifetime ISA (LISA) Up to £4,000**
Help to Buy ISA Up to £3,400 1st year then £2,400 yearly**
Innovative Finance ISA (IFISA) Up to £20,000

*The Junior ISA allowance doesn’t count towards your individual £20,000 ISA allowance
** The Lifetime ISA and Help to Buy ISA allowance will form part of the £20,000 ISA limit.

How to transfer an ISA

You can transfer ISAs between providers to make sure you’re getting the most out of your savings and investments.

With Wealthify, simply select the Transfer an ISA option from the website or our mobile app and fill in a short form with the details of the ISA you’d like to transfer. 

You’ll then be sent a transfer form in the post to complete. If you transfer an ISA from a previous tax year, it won’t count towards the current years ISA allowance. This means you can shop around for the best rates like you would with a credit card or current account.

An independent financial adviser could help you with your decision, taking in to account your personal circumstances and your future financial goals, making sure an ISA transfer is the best thing for you.

Can I get an ethical ISA?

Yes – There’s a number of ethical options available to you when opening up an ISA account. 

Wealthify has created its own range of five Ethical ISA Plans that let you invest in organisations committed to having a positive impact on society and the environment allowing you to do your bit for the future whilst giving your money the chance to grow.    

Ethical investing means different things to different people, so you’ll need to check that you’re happy with what’s included in your Plan when investing ethically.

 

1: Barclays Equity-Gilt Study: Source Telegraph: https://www.telegraph.co.uk/finance/personalfinance/investing/11477122/Historys-lesson-for-Isa-investors-Barclays-Equity-Gilt-Study-2015.html 

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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