Which ISA is right for you? A round up of the six products available in 2017
- Building up a rainy day fund
- Short term cash needs
- People over 16
You can save a maximum of £20,000 in 2017/18. Any interest earned is totally tax-free.
Interest rates on cash products have plummeted in recent years and there is currently only one product on the market offering an inflation-beating rate (Ikano Bank pays 2.35%), though you’ll need to tie up your money for five years.
The Personal Savings Allowance (PSA), introduced last April, has had a detrimental effect on the cash ISA market. It offers basic rate taxpayers the ability to earn up to £1,000 savings income (£500 for higher rate taxpayers), free from tax. With rates so low, it’s unlikely many people will be paying tax on their savings.
However, savings in cash ISAs are tax-free indefinitely so when rates eventually rise and you start to earn above your PSA, your money could be better off in an ISA.
Stocks and Shares ISA
- Investing to meet medium to long term goals
- Investing for and in retirement
- People over 18
You can invest a maximum of £20,000 in a stocks and shares ISA in the 2017/18 tax year, and your money can be withdrawn tax-free at any time, and for any purpose.
These are investment-based products so are riskier than cash ISAs. You can invest in shares of companies or in funds or investment trusts.
Calculations by investment firm Fidelity International show an investment of £15,000 into the FTSE All-Share Index 20 years ago would give you total holdings worth £52,965 today. If you’d saved the £15,000 in the average UK savings account over the same period, you would be left with just £19,916.
You can open a stocks and shares ISA on an investment platform such as Hargreaves Lansdown, Fidelity, Bestinvest and The Share Centre.
- Saving for a first house deposit and retirement
- People aged between 18 and under 40
This is the brand new ISA product which launched on 6 April. If you meet the age criteria, you can contribute a maximum of £4,000 each tax year and you’ll receive a 25% government bonus on anything you save. The government bonus is available until age 50.
The funds must be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account or they can be used in retirement. There’s a 25% exit penalty if the money is withdrawn before the age of 60 and not used towards a first home (apart from in the first year of the scheme in 2017/18).
You can open a savings or investment version of the Lifetime ISA, but many banks, building societies and investment firms haven’t been able to offer the product on its launch date.
Currently, Hargreaves Lansdown, Nutmeg and The Share Centre offer a stocks and shares Lifetime ISA to investors and Skipton Building Society said it will be ready to offer a cash version in June.
- Under 18s only
- Building up savings for a child
You can save up to £4,128 in the 2017/18 tax year in a junior ISA. The annual allowance is available to children from birth up to the age of 18.
Junior ISAs come in two forms – cash and stocks and shares products. With both, any earnings are protected from the taxman.
These products replaced child trust funds (CTF). You cannot hold both a junior ISA and a CTF but you can transfer out of the old scheme into a junior ISA.
Innovative Finance ISA
- Income seekers willing to take risk
- Over 18s
This type of ISA launched in April 2016. It allows people who invest in peer-to-peer loans to get tax free returns. Peer-to peer lending connects savers directly with borrowers, cutting out the middleman – the banks. Interest rates on offer tend to be higher than you’d get on a traditional cash ISA but the risks are greater and there is no Financial Services Compensation Scheme (FSCS) protection if something goes wrong.
You can invest a maximum of £20,000 in an innovative finance ISA in the 2017/18 tax year.
Help-to Buy ISA
- First time buyers looking to add to the money to put towards a property
- Regular cash savers
- Over 16s
Savers can deposit a maximum of £1,200 in the first month and £200 a month thereafter up to £12,000. The government adds £1 for each £4 you put in, but only at the point at which you purchase the property.
New accounts can be opened until November 2019 and additions to existing accounts permitted until November 2029.
You can use the funds to buy any home worth under £250,000 or under £450,000 in London.
See YourMoney.com’s First-time buyer: Should I transfer my Help to Buy ISA to the Lifetime ISA? for more information.