What’s the Lowdown on ISAs?
This is a guest contribution by Charles Dearing.
ISAs – What Are They and How do They Work?
Many of you will have heard of them but how much do you actually know? Are they a good form of investment? Or are there much better options? We’re going to try and explain the concept of this popular form of investment and introduce some of the different types.
What is an ISA?
ISA is a particular kind of account. The initials stand for Individual Savings Account. This type of account was introduced by the government in 1999 and offers certain tax incentives, in order to encourage people to save. And let’s face it, sometimes we do need a little bit of encouragement. They are not meant to be a retirement product. However, in 2017 a Lifetime ISA was introduced, that filled this gap. There are a number of different ISAs to choose from.
Different types of ISA
ISAs were introduced to replace PEPs (Personal Equity Plans) and Tax-Exempt Special Savings Accounts (TESSAs). Investments are made in cash and there are basically four different types.
Cash ISA
This is an investment that provides people with tax free savings in a deposit account. The account is generally held by a bank or building society. It offers a higher rate of interest than a standard savings account, while keeping the initial investment intact. However, this capital will not be protected from inflation. Accounts can either be instant-access, or for a set period of time. This is the best option if you want to get at your money quickly.
Stocks and Shares ISA
If you’re able to invest money for a longer period of time then an investment ISA is a better option. This type of ISA invests money in certain types of stocks and shares, rather than holding it in a bank account. Money can be invested in shares, bonds or funds and it’s up to you what these are.
Innovative Finance ISA
This is an ISA that’s made up of peer-to-peer loans, rather than cash or stocks and shares. Individual investors who are willing to lend are matched up with those who want to borrow funds. They could be businesses, property developers or individuals.
Lifetime ISA
This type has only been available since April 2017 and has a number of special incentives. It was designed to provide investors with a way of saving for a first property or their retirement that was tax-free. There are two types: a Cash Lifetime ISA and a Stocks and Shares Lifetime ISA.
What are the rules?
There are a number of different rules applied to this type of saving. You can put money into one of either of the types of ISA every tax year. Up to £20,000 can be put into one type or this amount can be split across more than one or all of them. However, the Lifetime ISA has a limit of £4,000. It is possible to transfer an ISA from one provider to another at any time.
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This is a guest contribution by Charles Dearing.
