ISAs: Need to Know

I’ve recently been speaking to a few friends about investing and a lot of them have been struggling to understand how ISAs work. So, as I’ve seen some news articles covering the subject, I thought I would also have a go at explaining them. I.S.A. stands for individual saving account and is a tax-free package for UK residents. There are a lot of different types but generally they were set up to encourage people to save. Although I’m used to talking about ISAs for stocks and shares there are ISAs for all scenarios. One of the greatest things about them is their flexibility.

There are 4 types of ISAs I will cover today: Cash, Stocks and Shares, Help-to-Buy and Lifetime. I won’t cover innovative finance because that’s not so basic. In short, they are used for peer to peer lending, if that interests you definitely do some research on them. Both Cash and Stocks and Shares ISAs can provide completely tax-free returns on deposits up to £20,000. There is no penalty for withdrawing from an ISA. Although depending on the type of ISA it may reduce your allowance. A flexible ISA means that if you deposit money and then withdraw stuff you still get all your £20,000 allowance. For example if you put in £10,000 then withdraw £3,000 you can still put £13,000 into the ISA but some ISAs aren’t flexible and you would only be able to put £10,000 (the remaining allowance).

What’s the difference? 

The difference between the two is the type of vehicle you can invest in. A cash ISA is the same as a regular saving account so bank or building society savings can be placed in them. Stocks and shares ISAs are much more flexible. As you probably guessed you can invest in shares, but you can also invest in collective investment schemes (like the cappuccino factor) or bonds. So, if you are planning on investing (e.g. cappuccino factor) you may as well use your £20,000 allowance. You can set one up from providers and most high street banks.

Lifetime and Help-to-buy ISAs are more tailored to long term investment and are therefore much less flexible. A lifetime ISA is similar to a saving account, but you can also get stocks and shares with select ISAs. A Help-to-Buy ISA is just a subset of the lifetime ISA. It is designed to help first time property buyers, but you can’t get stocks with it. These types of ISAs are designed for one purpose, so their withdrawal structure is very strict. The lifetime ISA is used to save for later in life and cannot be withdrawn from until you are 60 or over. If you do withdraw before then you will be charged 25%. The Help-to-Buy can only be withdrawn from to buy a first property so very situation specific. You also must have the Help-to-Buy ISA open for longer than a year before buying the property and you must intend to live in it. The Times has a great article on how to use these ISAs to get on the property ladder.

Use the government bonuses! 

The advantages of these ISAs are that the government will top up your contribution by 25%. The limit for the lifetime ISA is £4,000, this also counts towards your overall ISA limit. For example if you did deposit £4,000 the government will top it up to £5,000. So, if you want to save for a pension supplement or a pot later on in life this can be a great solution. The Help-to-Buy deposit limit is £200 a month apart from the first month when you can put £1,200 in. There is a overall cap for this type, you cannot have a pot of over £12,000 (£15,000 if you include the government top-up). When you go to buy the property your solicitor will be able to apply for the 25% top-up. So, if you are thinking of saving up for a house for a few years then you may as well do it tax free. Take your government top-up!

I’m hoping this clears up how ISAs can help and what they are used for. Most people don’t realise but there are lots of ways the government helps with saving and investing. So, whenever we can we may as well take advantage of these tax breaks. If you want to learn some basic investing techniques check out Money Mum for tips.