While the vast majority of ISA holders hold cash ISAs, use of stocks and shares ISAs is on the rise, with an increase of 246,000 accounts* in the 2017/2018 tax year. A growing number of people are discovering the different types of ISAs available, and trying different approaches to meet their financial goals. Understanding your options and exploring what’s out there could help you make your money work harder, so it’s worth taking the time to make the right choice.
What is an ISA?
An ISA is an ‘individual savings account’ – a type of financial product that allows you to take advantage of tax breaks while you save or invest. There are different ISA options available, and finding the best one for you is worth some serious consideration. Your goals, budget, risk tolerance and capacity for loss are all important factors when considering your best ISA option.
In a nutshell, you have a £20,000 ISA allowance for the 2018/2019 tax year. This means that you don’t pay tax on any money you earn in your ISA as a result of growth of your investments, dividends or interest. There are several different types of ISA. You can use or spread your ISA allowance across one or more of these accounts:
- Cash ISA - saving
A cash ISA is a savings account where you benefit from tax-free interest. You can usually get this through your bank account or building society.
- Stocks and shares ISA - investing
Get tax breaks on investments with a stocks and shares ISA. There are a number of online investment management services offering these.
- Junior ISA - saving or investing
For under 18s, there is the option of a cash Junior ISA or a stocks and shares Junior ISA, with an annual limit (2018/2019) of £4,260. You can open Junior ISAs from a range of banks or building societies.
- Innovative Finance ISA (IFISA) - investing
This offers tax breaks on peer-to-peer lending, for example lending money to businesses so that they can expand, or directly to people who need a loan. There are a number of providers and crowdfunding firms which offer IFISA services online.
- Lifetime ISA (LISA) - saving
In addition to the ISA tax benefits, with a Lifetime ISA you can get a 25% government boost on the money you contribute, up to a maximum of £1000 per year. To open a lifetime ISA, you must be over 18 and under 40 years of age. Most banks and building societies offer a Lifetime ISA.
With all types of ISAs it is important to remember that the tax advantages of ISAs may change in the future and also depend on your individual circumstances.
Is it better to save or invest money?
If you’ve reached a certain level of savings and you’re disappointed with the returns you’re getting through interest, you’re probably curious about how you could grow your money in a stocks and shares ISA.
Whether saving or investing is better for you depends on your personal financial situation and goals. If you have more than one financial goal, it might suit you to have more than one ISA account.
Here’s a comparison:
Click & Invest Stocks & Shares ISA**
Who can open an ISA?
How much do you need to get started?
You can start saving with any amount of cash
You need enough to diversify your investments
How much can you save tax free?
In the 2018/2019 tax year
In the 2018/2019 tax year
What time period is it recommended for?
Over longer periods inflation could erode the value of your savings
You need enough time to ride out market fluctuations
What’s the potential for growth?
Low interest rates mean you’ll get back about what you put in
Low - very high
Different strategies have different growth potential
What is the level of risk?
You’ll only really lose money to fees or value to inflation
Low - very high
There’s always a risk you could get back less than you put in
How quickly can you access your money?
Unless you lock money away in a fixed-rate ISA, usually for 1-5 years
Within 7-10 days
But withdrawing at the wrong time could mean you get back less than you put in
Cash ISAs are generally preferable if:
- You need an emergency fund in case of loss of earnings
- You have short-term goals and wouldn’t be able to wait for growth
- You might need to access your money at any time
- You don’t like the idea of putting your money at risk
A stocks and shares ISAs might be preferable if:
- You already have an emergency fund
- You have long-terms goals and can wait for results
- You won’t need to access your money for at least three years
- You’re willing to accept short-term losses for the chance of greater long-term growth
For a lot of people, this last point of short term losses is the biggest barrier; the risk that the value of your investments can go down as well as up. You can’t remove this risk, but there are ways to minimise it.
For example, you can:
- Choose a lower risk investment strategy. With the Click & Invest ISA, this would include our Defensive and Cautious strategies.
- Diversify your portfolio, and invest mainly in asset classes like government bonds, which are seen as lower risk. At Click & Invest we’ll select exceptionally diversified investment opportunities on a global scale to create the right balance for you.
- Invest for longer. While investments fluctuate in value much more than cash, over periods of five years or longer they can tend to increase in value.
The more comfortable you become with accepting short term losses, the more you potentially have to gain from higher risk investments.
A Stocks and Shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice.
**Other stocks and shares ISAs may be different
With investment your capital is at risk. The tax advantages of ISAs may change in the future and also depend on your individual circumstances.
This article is not intended to constitute personal advice and no action should be taken, or not taken, on account of information provided. Opinions given within this article are the speakers’ own personal views. The views and opinions are effective from the date of publication but may be subject to change without notice.