ISA season is upon us, so whether you’re looking to make the most of this year’s allowance, or planning ahead for the new financial year, you’ll need to decide which ISA works best for you.
Do your homework
These days there’s more to choosing an ISA than simply picking between a Cash and an Investment ISA, so familiarise yourself with the various options to see which one most suits your circumstances. Alongside Cash and Investment ISAs, there are Lifetime ISAs, Innovative Finance ISAs, Junior ISAs for under 18s and Help to Buy ISAs for first-time buyers.
Shop around
If you decide to go for a Cash ISA, don’t just accept the one your bank offers you. Shop around for the best rate, perhaps using online comparison sites that give a view of the wider market. Better returns are typically available with fixed-rate cash ISAs compared to their easy-access counterparts, providing you don’t mind locking your money away for a specific length of time. Looking for an Investment ISA? You might start by deciding whether you’re happy picking your own investments, or you’d prefer someone do it for you. If it’s the latter, keep an eye on annual management fees and any extra charges that might apply, as costs will eat into your potential returns.
Beware of introductory rates
Shiny introductory rates are great while they last, but many will drop significantly after the initial period ends. If your Cash ISA is more than 12 months old, check your rate now and if you’re not happy and consider transferring to another provider. If you’re comfortable with a little risk, you could consider transferring it to an Investment ISA for better potential long-term returns. Just remember to keep a separate emergency cash fund for quick access if you need it.
Check your ISA rules
What are your saving goals? Are you happy to tie up your cash for a while? These are all questions you should ask yourself before you start. If you’re 18-40 a Lifetime ISA gives you a 25% bonus on up to £4,000 saved each year, but the rules are strict and you can only use the funds for a house deposit, or for later-life. Always check the rules before you sign up.
Split your allowance
You can only open one each of the four main types of ISA: Cash ISA, Investment ISA, Lifetime ISA and Innovative Finance ISA each tax year, but the good news is, you can split your annual ISA allowance between them any way you like, as long as your Lifetime ISA contributions don’t exceed £4,000 per year. This gives you flexibility to have a mix of easy-access savings to cover emergency funds and longer-term investment pots for future goals, if that’s what suits you.
Watch out for hidden fees
Unlike Cash ISAs, there are likely to be fees and charges payable with an Investment ISA, including platform fees, management fees and/or fund charges depending on what you’re investing in. Beware of hidden costs too, like rebalancing and withdrawal charges – always check the fee tables and the small-print.
Get help if you need it!
If you are unsure, there are a number of sources of free impartial advice available online, like the Money Advice Service, or if you want to get advice specific to your circumstances, you should speak to a qualified financial adviser.
Please remember that the value of your investments can go down as well as up and you can get back less than invested.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
