‘Why do I need a guide to ISAs?’ – you may ask.
Because the number of saving and investing options has increased dramatically and with this, our choices have become non-trivial.
I still remember the time when saving options were few and saving was easy.
Okay, not easy but it was uncomplicated. I had a current account (for my readers in the US, ‘checking’ account) and a savings account. I had one credit card and…
…well, this was it. I didn’t need a guide to ISAs.
My saving arrangements were uncomplicated not because I was a personal finance maverick: as you are my witness I was very far from it. My saving arrangements were simple because there weren’t many saving options.
This is no longer the case. We have a choice of different saving instruments and different providers. One of the more popular saving options is the Individual Savings Account or ISA.
Now, let me ask you a question: can you tell me what varieties of ISAs are available, or will be available soon?
I thought so. When I took this little test, I couldn’t name all of them either. That is when I do some research so you don’t have to. And this is why you need a guide to ISAs.
(For the record, I still like my saving options simple so I have a stocks and shares ISA with Nutmeg.)
What kinds of ISA can you open?
Cash ISAs are very similar to normal savings accounts with one difference: you generally don’t need to pay tax on the interest that it earns. To open a cash ISA you have to be a UK resident aged 16 and over.
There is strict annual allowance that you can save in the cash ISA which is currently £15,240. For the year 2017/18 this will go up to £20,000.
There are different kinds of cash ISAs. These are:
- Easy access. These ISA accounts are easy to access and pay variable rates of interest (at the moment this rate is low with the highest offered by Virgin Money at 1.26% p.a.).
- Fixed rate. These ISAs pay a fixed interest rate for a set term. Put differently, these account offer higher interest rates than the easy access, variable accounts but you have to be prepared to lock in your money for a certain period.
Stocks and Shares ISA
There is a wide range of stocks and shares ISAs and even their name is misleading: you can invest in anything within an ISA including ETFs, bonds etc.
Apart from that, you can go for a simple arrangement, like the one offered by Nutmeg, whereby you simply specify the level of risk you are prepared to take and leave the constitution of your portfolio in the hands of experts.
If you like to be a bit more hand on, you can go with a platform like rPlan. And if you really like to play around with stocks and shares you can use a provider like TD Direct Investing or any other internet based platform.
It is important to remember though that putting your money in stocks and shares ISA carries the inevitable risks of investing.
Junior ISA is a tax efficient way to save for the future of your children.
To open a Junior ISA on behalf of a child you have to be over 16 years old and UK resident; or be over 16 and less than 18 years old to open one for yourself.
There is also the small matter that a child is not eligible for a Junior ISA if they qualify for child trust fund (CTF). This effectively excludes children born between September 1, 2002 and January 3, 2011.
The Lifetime ISA (LISA) is new off the shelf and will be available from April 2017.
This one aims to encourage people to save more for buying their first property or retirement.
You have to be between 18 and 40 years old to open a LISA and the annual contribution allowance is £4,000. Good news is that the Government will match any savings in a LISA with a 25% contribution.
Sounds interesting but let’s see how it is going to work.
Innovative Finance ISA (IFISA)
This one is interesting.
I find it exciting because it is new – it was launched in April 2016 – and because this ISA focuses on P2P lending.
I’m not going to waste your time writing about it; just have a look at the infographic below.
Before you do that there are two things to remember when you invest in ISAs:
- The annual ISA allowance is an overall one. This means that you can open cash, stocks and shares or innovative finance ISAs but the total value of these cannot exceed the annual ISA allowance. These doesn’t include Junior ISA and LISA.
- Each ISA account is guaranteed to the value of £75,000.