ISAs (Individual Savings Accounts) are one of the UK’s most popular ways to save.
They allow you to save up to £20,000 a year in cash, stocks and shares, or a mixture of the two, with all interest and growth free from tax. That means when you withdraw money from your ISA you will not have to pay any income tax or capital gains tax on the proceeds.
But with more options on offer than ever before, you may need advice to help you choose the right one for you.
To help get you started, we’ve put together a simple guide to the most popular types of ISAs available and the allowances they include.
Like standard savings accounts available from banks and building societies, there are a variety of cash ISAs to choose from, including instant access, regular savers and fixed-rate accounts. Interest earned is tax-free.
A cash ISA can be a good choice for short-term savings goals such as emergency funds, holidays or home improvements. But in the current climate of low interest rates, inflation may eat into your capital over time so cash ISAs may not be appropriate for longer term objectives.
Stocks and shares ISA
These allow you to invest in assets such as shares, funds or bonds traded on the stock market, with all investment returns free from tax.
The types of investments that can be accessed through stocks and shares ISAs are more risky than cash ISAs, especially in the short-term because stocks and shares can be volatile.
However, over the long term, equities have typically achieved better returns than cash – but require greater tolerance of fluctuations in value.
Stocks and shares ISAs are excellent for long-term savings goals such as building up a large sum for retirement, paying off the mortgage early or helping to pay for childrens’ school fees.
Junior ISAs (JISAs) allow you to place up to £4,368 a year, per child with no effect on your own annual ISA allowance.
The money can be invested in cash, stocks and shares or a mixture of the two, with all growth tax free, just like with adult ISAs.
If you previously held a child trust fund (CTF), then money from the CTF can be transferred into a JISA.
Junior ISAs are excellent ways to give your children a financial head start, but bear in mind that when they are 18 they can take control of the funds themselves.
A Lifetime ISA (LISA) can be opened by savers aged between 18 and 39, and contributions can continue until age 50. But even if you do not qualify yourself, a LISA may be a suitable choice for one or more of your loved ones.
The aim of a LISA is to build a tax-efficient fund for retirement or to put towards purchasing a first home. The LISA has an annual maximum contribution of £4,000, which is subtracted from your annual ISA limit, and it is definitely worth considering if you meet the qualifying criteria.
The key benefits include a 25% government bonus on top of your contributions. So, if you contribute the full £4,000 each year, the government will add another £1,000 in free money, provided the LISA funds are used to buy a first home worth less than £450,000, or withdrawn after age 60.
Penalties apply if you make withdrawals for any other reason.
The value of investments can fall and you may get back less than you invested.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
Past performance is not a guide to future performance.
No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.