What are the different types of Individual Savings Account (ISA)?

An ISA (Individual Savings Account) is a tax-free way to save or invest. Any interest earned on savings or bonds and any capital gains made on investments held within an ISA are tax free. For this reason, if you are thinking of saving or investing, an ISA account could be a good option. ISAs come with a limit on how much you can invest each year. In 2017/2018, this is set to £20,000.

There are currently five types of ISAs and this is a breakdown.

Cash ISAs

Cash ISAs have features that are similar to standard saving accounts. Standard ones come with a range of different taxes, according to taxpayer, which you have to pay on your interest. On the other hand, with Cash ISAs, the interest is tax FREE. There are a variety of different cash ISAs available, including instant access, regular savers and fixed-rate deals.

In order to open an account, you don’t have to pay anything. You can open a cash ISA if you are aged 16 or over and you are resident in the UK.

Help to Buy ISAs

Help to Buy ISAs were launched in December 2015 for first-time buyers only. If you’re a first first time buyer, an Help to Buy can make a difference. This was designed to boost people savings towards a property purchase by 25%.

If you’re 16 or over you can open an account, with an initial deposit of up to £1,200. You can then make further contributions of up to £200 per calendar month. When you are ready to buy your property, the state claims your bonus, which is 25% of your closing balance, from the Scheme, to put towards your purchase.

This means for every £200 you save, the government will add £50. The minimum bonus is £400, on a minimum savings balance of £1,600, and the maximum is £3,000, on a savings balance of £12,000. This Scheme applies to properties in the UK with a purchase price of up to £250,000 outside London and £450,000 within certain London Boroughs.

For full details of the Scheme Rules and property eligibility, you can check helptobuy.gov.uk/isa.

Innovative finance ISAs

The UK Government introduced the Innovative Finance ISA (IFISA) in April 2016. This can include several things, such as peer-to-peer lending and crowdfunding. By opening an account, you will get interest from lending money to other people or companies. This is tax FREE.

In this case, the capital is at risk; so this is the main difference from cash ISAs. You are technically lending money, so there is a chance the borrower won’t repay. Risks are mitigated by spreading your cash across multiple loans, or provider-backed safeguard funds.

Lifetime ISAs

This scheme was launched on 6 April 2017. A LISA allows you to save up to £4,000 a year as a lump sum or by putting in cash when you can. The state will afterwards add a 25% bonus on top. If you save the full £4,000 you’ll have £5,000 and this is before interest or growth.

There are some details you need to take into account:

• The first year’s bonus is paid in April 2018. Afterwards, this will be paid monthly.
• The bonus is paid until you hit age 50.
• The bonus is based on the contributions you make.
• The maximum you can get as a bonus is £32,000, if you open the account when you are 18 till age 50.

Stocks & shares ISAs

ISAs can also be used for investing. This last type is called stocks & shares ISA, because you can invest in funds, bonds and shares in individual companies. These ISAs are usually managed by an online service, fund management group or fund supermarket.

Before you commit to a stocks and shares ISA, you need to understand all the risks involved. You also need to be aware that many providers charge a fee for you to open and hold an account. You might also be charged if you want to change any of your investments, withdraw your money or move it to another company.

The benefits:

• The returns can be higher than cash ISAs.
• There is no need to declare any investments on a tax return.
• Any gains you make are protected from capital gains tax. There is no tax on profits, interest on bonds or even dividends.

Investing is a long term game, so you should be comfortable with keeping the account for longer than six years.