As with many fine-dining experiences, a simple down-to-earth menu is all you need to help you navigate the complexities of 'millefeuille' interest, tax-free 'girolles', fixed rate 'mangosteen' and 'truffle velouté' savings vehicles.
So, let's tuck into those ISAs!
Think of the ISA wrapper as a little like Tupperware. You put in your savings pot and it protects it from all sorts of germs and nasties – or the tax man in this analogy. Within an ISA, any increase in the value of your savings and any income you receive, is tax-free. Good stuff.
In the 2018/19 tax year, you can put in £20,000. That’s pretty generous and, as such, can be used to build up a chunky pot for university fees, retirement, or indeed something completely frivolous.
Cash ISAs are really just another type of savings account. However, the rates tend to be more attractive.
Investors can invest in one Stocks & Shares ISA, one Cash ISA and one Innovative Finance ISA (see below) each tax year, and can split the £20,000 allowance between them as they see fit.
There is really no downside to keeping your investments in an ISA wrapper. They are mostly free. They are flexible, so money can be taken out at any time. They allow you to build up a nice income stream, or a capital pot without ever having to trouble the tax man. You don’t even have to put it on your tax return.
The list is endless. In fact, it’s difficult to think of any reason why you wouldn’t use it as your first port of call for cash savings.
For cash ISAs, you can consult the best buy tables: Savings Champion, for example gives you an idea on the best fixed and flexible rate cash ISAs.
Hesitant to save into an ISA? Find out more about using Cash options to save.
It works much the same way as its senior equivalent. All children resident in the UK are eligible for a Junior ISA. Anyone – parents, grannies, generous godparents – can contribute up to the annual limit. It automatically converts to a normal ISA at age 18.
£4,260 for the 2018/19 tax year.
Junior ISAs are just as flexible as a normal ISA. Investors can invest in range of underlying investments, including cash, the stock market and government bonds. The temptation – because it is for your children and they are precious little things – is to be very risk averse, keeping it all in cash. However, we might suggest that you can afford to take a little more risk with children’s savings because you have 15 years or more to ride out the highs and lows of markets.
They have all the benefits of a normal ISA in that any growth or income in the underlying investments is tax-free. With normal investments, any income over £100 a year is taxed at the parents’ marginal rate (to stop parents dodging tax by giving money to their children). This doesn’t happen with ISAs so you can build up income generating investments without incurring a tax bill.
Junior ISAs can be a great way to give your little darlings a nest egg to buy a house, car, fund their education etc. However, you need to be aware that you can’t control what they do with it. All the money you put in is locked away until your child's 18th birthday. At that point, it becomes their cash and they are free to do whatever they like with it. If you’ve got a responsible one, you might be lucky and they’ll use it for their university fees; if you haven’t, maybe don’t tell them it’s there (did we just say that?).
For the most competitive Junior ISAs, you can take a look at all the best buy tables out there. Savings Champion, gives you an idea on the best fixed and flexible rate Junior ISAs.
However, as above, if you only use cash, the pot may be diminished by inflation. You have a long time to invest and ride out the ups and downs of the stock market. If you want to invest in the stock market through a JISA, you will need to sign up with an investment platform (you can filter our Best Buy platforms by Junior ISAs), which gives you a range of investment options.
Get more details on Junior ISAs through our Junior ISAs Investing Guide.
Same protective wrapper, slightly spicier contents. With a Stocks and Shares ISA, instead of holding cash, you hold stock market investments or bonds, or investments trusts or collective funds. The choice is broad.
ISAs are hugely flexible in terms of what you can put in them. For those willing to take some risk, you can put in Stocks and Shares, but you can also put in lower risk investments such as government bonds. For those who want a bit of excitement, you could also put in AIM stocks.
Again, there’s pretty much no downside to keeping your investments in an ISA wrapper. There’s usually no cost to it and you can use them to build up a nice tax-free income, or a growing pot.
Everyone. It’s usually the best investments option for dipping a tentative toe in the stock market.
There are plenty of options. The most flexible is to sign up with an investment platform. This gives you a range of investment options. Minimum investment levels are usually around £25-£50 per month for regular savings, or £100 as a lump sum.
Some fund companies still offer ISAs direct, which can be cheaper. This is particularly true with investment trusts, which often have individual savings schemes, like this one from Baillie Gifford, or this one from Aberdeen.
Want to know more about Stocks and Shares ISAs? Take a look at our Stocks and Shares ISAs Investing Guide.
Since April 2017, the new ‘Lifetime ISA’ has sat alongside the normal ISA as an option for the under-40s. The Lifetime ISA has all the usual ISA traits – tax-free income and gains – however LISAs have an added bonus: The government tops up the contributions by 25% up to the age of 50. Although, this does mean that Lifetime ISAs come with more strings attached.
Investors can put up to £4,000 into a Lifetime ISA every year. Those that put in the maximum every year will receive an extra £1000 from the government.
The Lifetime ISA combines all the lovely benefits of an ISA – tax-free income and gains – with some of the attractive features of a pension – a little bonus from the government. Unlike the help-to-buy ISA (see below), it can be invested in Stocks and Shares as well as cash.
But, and it’s a big but, there are restrictions on the way this money can be used: The money must be used for a first home, up to the value of £450,000 (note: the money will be paid directly to the conveyancer/solicitor, so there’s really no getting round this), or for retirement at age 60 and over. Investors can withdraw money before 60, not for a house purchase, but the government will claw back its contribution and any growth in that contribution. There will also be a 5% surcharge on the amount withdrawn.
The Lifetime ISA will have a place in a savings portfolio for many under-40s, alongside conventional ISAs and pensions. It may particularly appeal to those who do not have pension provision through an employer, such as the self-employed, or those who want to save for a deposit on their first home.
Stocks and Shares Lifetime ISAs are offered by most of the major platforms. Skipton Building Society, Newcastle Building Society and Nottingham Building Society are the only companies which currently (as of Nov 2018) offer Cash-only Lifetime ISA.
You can get all the nitty gritty details on Lifetime ISAs in our Lifetime ISAs Investing Guide.
The Help to Buy ISA is designed for those buying their first home. It is a cash savings scheme, where the government will boost your savings by 25% when you complete the deal.
You can save up to £1,200 in the first month, and then £200 per month, up to a total of £12,000. It can only be invested in a first home worth up to £250,000 outside London, or £450,000 in London.
Help to Buy ISAs are a cash savings product only.
They have all the benefits of a normal ISA in that any growth or income in the underlying investments is tax-free, but the government top-up is an additional bonus for savers. However, they are only available to first-time buyers – your solicitor or conveyancer has to apply for the government bonus, when they will add it to the money for your first home.
It is for anyone over 16, who is saving to buy a first home. It is possible to open one up until 30th November 2019 (after which they won’t be available to new savers anymore) and it will still be possible to get the bonus for a deposit until 2030. The definition of first-time buyer is strict – it is someone who has never owned an interest in a property, either in or outside of the UK. They are an individual product, so two people buying a house together can save up to £24,000.
Most of the banks now offer Help to Buy ISAs, with varying rates of interest. Our friends at Savings Champion list out the various options here.
Can't decide between a LISA and a Help to Buy ISA? Take a look at Helena Wardle's advice to Balwant when he asked which would be the best option for him.
This is a little bit of a left-field option. As the banks have decided to lend only to a very select bunch of people and companies, other lenders have moved in. These are peer to peer lenders such as Lending Works, Zopa and Crowdstacker. Investors receive a higher rate of interest – up to 6-7% - in return for lending money to businesses and individuals, but do take the risk that they might not pay it back.
You can put in the full £20,000 (18/19 tax year) as long as you’re not putting money into one of the other ISA types.
These are specifically designed to hold peer to peer loans to businesses and consumers and some other ‘new finance’ options. It is limited to lending, rather than taking an equity stake.
They have all the benefits of a normal ISA in that any growth or income in the underlying investments is tax-free. The income on peer to peer loans tends to be higher than that available on other investments – at 6-7% - though the risk of not getting paid is higher.
Peer to peer lending can be a good option for income seekers. While it should never make up the whole of a portfolio, it can provide a nice boost when savers are only getting 1-2% from a conventional savings account. However, it isn’t cash, and shouldn’t be considered an equivalent. Borrowers can, and do, default.
Part of the problem with Innovative Finance ISAs is that not many are available yet. Only a handful of providers are set up to offer them. These are the specialist peer to peer lenders, such as Crowdstacker, rather than the mainstream investment platforms or the banks.
Innovative Finance ISAs are not right for everyone. Check out our article easyMoney or Dangerous Debt? The truth about Innovative Finance ISAs to find out more.