The Many Faces Of The Humble ISA

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So I’ve been getting a lot of questions about ISAs lately – and not just about one type of ISA, but about all of them! LISAs have also had some negative press lately, so I thought that now would be a good time to write about the humble ISA.

What The Bleep Is An ISA Anyway?

The ISA is an Individual Saving Account. The ISA has been around since 1999 when Gordon Brown brought them in his first budget.

Anyone can open an ISA (even children can have one), and this special savings account shields a portion of your money from the tax people. Payments into the account are made from after-tax income. You don’t have to pay income tax and capital gains tax on the money when you withdraw it.

Every year a new allowance is announced.

2017/2018 and 2018/2019 has had a limit of £20,000.

I remember as a teenager my mum telling me to save into a cash ISA, but I didn’t really have a clue as to why and she didn’t really know how to explain it to me. So I used it like a current account and took money out when I needed it. This was a BIG mistake. Once the money is withdrawn, you CANNOT replace it. A limit of £20,000 means that you can only put up to £20,000 into the account, but if you take out £10,000, you cannot put an additional £10,000 back into the account during the same tax year to compensate. You have to wait for the next year’s allowance.

Best thing to do is to treat an ISA like a one-way valve. Once it's in it's in!

The great thing about ISAs (not just because its a tax free account), is that now there are many options to choose from where you can spend your allowance.

Fun fact: it is possible to become an ISA millionaire, but you have to be putting away the full allowance amount every year, and it has to be invested. And this brings me on nicely to the types of ISA you can put your money in – because it’s not all about cash only.

1. Savings ISA

So I’ll start with cash ISAs because this is the one that most people know and feel comfortable with. Every April, you get a new allowance and you can open an ISA account. It’s similar to a lot of savings accounts in that each provider will have a savings interest rate that they offer you.

To find the best rates, simply do a search online using a comparison website. Each provider will have their own limitations of what you can and cannot do. You might not be allowed to remove the money for a few years for example. But this is ok, because remember that ISA saving is a one way valve. When the interest rate is due to run out, or it becomes too low, you simply transfer the money to another provider. Providing you transfer the ISA money into another ISA account, you don’t lose it (so don’t just take it out yourself).

So for example – let’s say last year you maxed out your ISA of £20,000 in savings at 2.5% interest, but the rate only lasted a year and soon it’ll be 1%. Well this isn’t good, so you need to move it.

This year you have a fresh ISA allowance of £20,000 and you’ve found an account with a different provider of 3%. Fab! So all you do is open the new ISA account, and then ask the provider to transfer your old ISA from the previous provider directly into it.

If you’re going to stick with cash ISAs, then you need to keep an eye on the savings interest rates so you can get the best ones as long as possible. If in doubt, always call the provider and ask as many questions as you need to so that you feel comfortable.

2. Investment ISA

This is my favourite type of ISA – a stocks and shares ISA! As the name suggests, you can invest your £20,000 limit into investments like bonds, gold, exchange traded funds and index trackers.

The gains you make on the money you invest into an ISA are also tax free. If you use a stocks and shares ISA as an extension of your workplace pension (NOT instead of), it gives you an extra source of income in retirement. It can “top-up” your pension payments every month, or it can supply a lump sum if you need it for something like a trip away.

So for those of you aiming for early retirement, you absolutely need to take advantage of your ISA allowances because this is one of the few things you can access before the age of 55!

Word of caution: stocks and shares can lose value as well as gain value, so your ISA will only do as well as what you put into it. Feed it with lots of lovely low-cost and diversified funds that contain a broad range of companies and you’ll be giving yourself the best chance.

3. Lifetime ISA

I feel sorry for the little LISA. It’s been getting a bashing lately. Loads of people in the finance world think LISAs are pointless and should be scrapped, but I disagree. As a non-financial-background-type person, I think it’s great to have choice and flexibility, plus this is something that we can get involved with ourselves and actually see the benefit of using it.

So what is it? LISA stands for life-time ISA. It was introduced in the previous tax year and allows people to either save for a new home, or contribute towards their pension. It comes in two flavours – cash or stocks and shares.

You can put up to £4000 per year into it, and this comes out of your £20,000 per year overall allowance. Then, every month, the government will give you 25% of whatever you put into the LISA up to a maximum of £1000. So in other words, for every £4 you put in, you get £1 from the government.

There are a few caveats to this.

  1. You have to be aged 18-40 to open an account
  2. You can pay into the account until you turn 50
  3. You can’t get the money in retirement until you reach 60 (that’s still earlier than the state and many workplace pensions)
  4. If you use the money for house buying, it has to be in the UK, you have to be a first-time buyer, and it has to be a house worth less than £450,000.

If you are self-employed or a low-income earner, then the LISA is a great extension of your work-place pension (note I said extension, not replacement – you need to be doing both), but for high-income earners, it is not so cut and dry. The tax benefits of a LISA are not as spectacular, and you can do better to use a SIPP instead. In all employee situations, max out your workplace pension first, because you get free money from your boss as well as the government. Then, when this is maxed, you can start filling up a LISA/SIPP if you want to.

4. Innovative Finance ISA

Now we’re starting to get juicy! The IFISA came in to being in April 2016. It allows you to use your ISA allowance to invest in peer-to-peer lending. This is a type of lending where you are giving money to a business directly to fund their growth and development. It’s a really exciting idea! Companies can “pitch” their idea directly to you, and if you like it, you can stump up some money to help them. When several others do the same, the company then has the money they need, and you (hopefully) benefit financially.

Which? has a brilliant resource on this and lists out a number of companies you could get involved with. The options range from property and loans to green energy and entertainment. It’s really exciting!

Now I do have a word of caution (sorry!). When you lend to a business, there is no guarantee you’ll get your money back, let alone the returns they claim. For this reason, I would seriously hesitate before sinking your life savings into the next big venture. If you do it, put part of your allowance towards it, but not all.

I think the IFISA provides another layer of flexibility, but ideally the basics need to be right first – have an emergency fund in place, a f*** off fund ready “just in case” and get your ISAs up and running. Then, if you have some extra cash for peer-to-peer lending, you can go for it safe in the knowledge that you have a financial cushion beneath you and that you won’t miss the money if it loses.

It’s definitely worth exploring though!

5. Help To Buy ISA

The HTBISA came into being in 2013, and was designed to get people onto the housing ladder (as the name suggests!). Like the LISA, you get a 25% bonus, but only once you reach £1600 in savings. The maximum government bonus you can receive is £3000 (£12,000), and you only get it when your solicitor applies for it in the house buying process.

You’re allowed to save £200 maximum per month (with the exception of month 1 where you can save an additional £1000).

The money can be put towards a a house that is worth less than £250,000 (or less than £450,000 in London).

The Help To Buy ISA is being phased out, and according to the help-to-buy website, the 30th November 2019 is the last day an account can be opened. The bonus then needs to be claimed by 1st December 2030. If you already have one of these, you can keep saving right up until 30th November 2029, giving you a year to buy the property.

16 year olds can open these accounts, so if you want to help get this sorted for your teenager, get them doing it now (because you can’t open the account for them!

6. JISAs

And finally this brings me on nicely to the Junior ISA. It’s the kiddy version of the main ISA, and the money is tax-protected. The maximum limit for 2018/2019 is £4,260. Like the LISA, it comes in two flavours – cash or stocks and shares.

Anyone under the age of 18 can open one, and if your child was eligible for a trust fund (born between 1st September 2002 and 2nd January 2011) this can be converted to a JISA instead.

Now this is the thing that gives parents the heebie-jeebies. The money is locked away until the child turns 18. They gain control at 16, but cannot withdraw until 18. A lot of people don’t like the idea of their 18 year old having access to so much money, but I disagree.

If I have children, my plan would be to educate them about money throughout their young lives, and show them how their money is increasing when they can understand. I would explain what the money is for, and what it ideally is not for. Then my hope is they take the advice on board and do something worthwhile with it. If they don’t, well then it’ll be a harsh lesson for them to learn because they will have to rebuild their money from scratch.

If you don’t like the idea of this, then just keep the money in a regular children’s savings account so that you have the control.

7. Flexible ISAs

This genius little invention is for those who have cash ISAs. There are certain banks and building societies who will ALLOW you to withdraw money from an ISA and replace it WITHOUT losing your ISA allowance. This is money have a great article on flexible ISAs and how you can use them to build your savings by removing money throughout the year and putting the money in something that returns a better rate before replacing it again. How fab! The money saving expert also has a handy list of which banks allow flexibility with an ISA.

Take a look and see if it is something you can take advantage of.

Final Thoughts

As with all things, make sure you do your own reading. I’ve picked out reputable sources for you to look at. The ISA is an awesome tool, and one that is massively misunderstood, so just remember, once the money is in one, it stays in until you absolutely need it. You can use ISAs to “top-up” your retirement saving and investing, and they are handy for first time buyers.

The government doesn’t often provide gifts, so make sure you use yours!

Until next time,

 

 

 

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