Confused about ISAs?
Posted on May 21, 2019
Let’s go back to the year when the Euro € was launched, Glenn Hoddle was dismissed as England football team manager, the minimum wage was set at £3.60 (for workers over 21) and knighthoods were given to Sir Alex Ferguson and Sir Trevor McDonald. Have you guessed the year yet?
1999! The year that ISAs were launched during Gordon Brown’s term, which replaced PEPs (Personal Equity Plans) and other types of special tax-exempt savings accounts.
Back then the maximum investment for the tax year was just £7,000 (now £20,000 in the 2019/20 tax year). If you had invested the maximum ISA allowances since inception, you’d have invested a massive £206,560. If you had invested the monies at the start of each tax year, there would have been a considerable gain (upwards of £15,000 if you assumed a 5% annual growth) as opposed to those who invested towards the end of the tax years so it just goes to show that using your allowance early pays dividends!
Each person has a £20,000 ISA allowance to use in the 2019/20 tax year which runs from 6th April 2019 to 5th April 2020. This allowance can be split between the various types of ISAs currently available in the marketplace.
There are now a whole host of ISAs available for different purposes and different risk appetites:
- Cash ISAs
- Stocks & Shares ISAs
- Help to Buy ISAs – launched in December 2015
- Innovative Finance ISAs – from April 2016
- Lifetime ISAs – launched April 2017
Let’s take a quick look at each of the above:
The cash ISAs are aimed at those not wanting to take any risk with their money. As a result of this low-risk type of investment, the interest/bonus rates tend to be minimal unless you are willing to lock your money away for a period of time.
Stocks & Shares ISAs
There are many variants of these with different attitudes to risk. Some ISAs invest directly in stocks and shares which means that their investment will fluctuate in line with stock market performance, but these also have the potential for greater returns. Other types of stocks and shares ISAs, such as Sheffield Mutual’s Investment ISA, pool monies together and invest in a mix of assets to spread the risk. These types of ISA aim to provide a better return than a cash ISA but with lower risk than investing directly in the stock market.
Looking to buy your first home?
There are a couple of options available to you, the Help to Buy ISA and the most recently launched, Lifetime ISA (LISA) but you can only pick one.
You can invest up to £4,000 per tax year and the government will add £1 for every £4 you save; so if you save £4,000 in one tax year, the government will add £1,000. The Lifetime ISA is available as cash or stocks and shares. There are a few restrictions with this:
- To retain the government bonus, the funds must either be used to purchase your first home (which can be up to the value of £450,000) OR when you access the monies after your 60th birthday for your retirement.
- You will need to have held your LISA for at lease 12 months before you qualify for the government bonus.
- You need to be aged between 18 – 40 to open this ISA.
- If you wish to take withdrawals other than for the purposes of a house purchase or for your retirement this will affect your bonus and you will also be charged 25%.
Help to Buy ISA (Only available until November 2019)
If you are saving to buy your first home, you could save money into a Help to Buy ISA and the Government will boost your savings by 25%. So, for every £200 you save, receive a government bonus of £50. The maximum government bonus you can receive is £3,000.
- In your 1st month, you can add up to £1,200 to kickstart your plan
- Save up to £200 per month thereafter
- You need to have saved at least £1,600 before you can claim the government bonus
- When you buy your first home, your solicitor will apply for the government bonus
For further information visit: https://www.helptobuy.gov.uk/help-to-buy-isa/how-does-it-work/
Innovative Finance ISAs
The UK Government introduced the Innovative Finance ISA on 6th April 2016. The “IFISA” allows individuals to use some (or all) of their annual ISA investment allowance to lend funds through the growing Peer-to-Peer lending market, whilst receiving tax-free interest and capital gains. Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers. Because you're cutting out a bank by investing your money through an online portal - known as peer-to-peer lenders - you tend to earn higher rates of interest than a traditional savings account. Please also read below ‘FSCS Protected’.
One thing to bear in mind when choosing an ISA is whether or not your money is protected by the Financial Services Compensation Scheme (FSCS) – The FSCS is the UK’s statutory fund of last resort for customers of authorised financial services firms. This means that the FSCS can pay compensation to consumers if a financial services firm is unable, or likely to be unable to pay claims against it.
Different ISA providers will have different levels of cover so it is always worthwhile checking what level of cover is in place before you apply. Innovative Finance ISAs are not covered by the FSCS.
You can find out more about Innovative Finance ISAs here: https://innovativefinanceisa.org.uk/
There have been a few new features added to ISAs in recent years. One we'd like to cover in this blog was put into place back in 2014, a new rule called ‘Additional Permitted Subscriptions (APS)’ which allows the transfer of a deceased ISA holders existing ISA pot across to their surviving spouse/civil partner. There is quite a lot to take in with with the APS rules, so we have created a help sheet which can be viewed here: http://bit.ly/30ocAh7
The key thing is to do your research and pick the ISA that is right for you and your circumstances. If you are unsure as to which might be best for you and which would fit your appetite to risk, you should consult a financial adviser which may incur a fee.
This blog provides generic information and opinions of the writer and should not be relied upon for making investment decisions. No advice has been provided by Sheffield Mutual. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand. Any reference to taxation is based on the writer’s understanding of current tax legislation and practice, which could change in the future.