An ISA, acronym which stands for Individual Savings Account is a particular type of tax-exempt savings account available to UK residents.
An Individual Savings Account allow to fulfil different objectives and needs, from saving for a child’s university education to retirement, but also to satisfy a few small wishes. Depending on personal needs and expectations, there are different solutions, from traditional ISAs, such as stocks & shares ISAs, to those designed for children, such as the Moneyfarm JISA, an account that allows to save money for children or grandchildren.
If you want to find out more on ISAs, how they work and how many types exist, keep reading the following paragraphs.
What an ISA is and how it works
As mentioned above, an Individual Savings Account is a savings account designed for UK citizens and which offers specific tax benefits on money deposited into the account.
First introduced in April 1999 – replacing PEPs (Personal Equity Plans) and TESSAs – ISAs are not subject to income tax and Capital Gains tax. However, those who choose this type of financial instrument must bear in mind that the maximum amount that can be saved annually is subject to annual changes, and for this reason, it is always a good idea to inform oneself carefully before taking any kind of decision.
Depending on personal needs and goals, people can choose between different types of ISAs, and some of them, i.e., Lifetime ISA also offer some government bonuses.
Types of ISAs
There are four main types of Individual Savings Accounts, namely, stock & shares ISA, Cash ISA, Lifetime ISA, and Innovative Finance ISA. Let us look at them:
- Stock & shares ISAs are financial instruments which present high risk but potentially higher returns in the long run. This kind of investment involves the purchase of securities and fund shares, the return earned from trading securities or share within the account are completely tax free.
- Cash ISAs are savings accounts designed to deposit money and earn interest, once again, exempt from income tax and Capital Gains tax. In general, Cash ISAs are considered low-risk, thus they offer a lower a lower rate of return.
- Lifetime ISAs are accounts specifically tailored to those aged 18-39. Who holds this type of account receive a 25% bonus at the end of the year, calculated on sums up to £ 4,000.
- Innovative Finance ISAs (IFISA) are available since 2016 and they are aimed at investing in peer-to-peer loans. This type of investment carries with it risk, as there is no guarantee of return. It is important to be aware of the risks involved in investing in peer-to-peer loans, as they are not covered by the Financial Services Compensation Scheme.
Junior ISAs
In addition to the above-mentioned ISAs, there is another type: the Junior ISA (JISA). Junior ISAs are aimed at saving for children and offer a wide range of investment options and financial instruments, such as mutual funds, ETFs, bonds, and shares. It can be opened by a parent or a legal guardian of the child, who becomes the holder of the account once he or she turns 18.
This instrument was created to allow parents and grandparents to invest money to create future opportunities for their children and grandchildren. However, JISA comes with a restriction on the total amount that can be deposited in a tax year, i.e., £ 9,000. On the other hands, the other ISAs have an annual allowance fixed at £ 20,000.
