Whether you’re looking to save for retirement, make an impact investment, or invest long-term in the stock market, this can be achieved within the ISA tax wrapper using the annual ISA allowance.
But it’s critical that before making saving and investment decisions, you have taken the time to understand the features of each type of ISA, and sought advice from an independent financial advisor.
To help get you started, here are some key points to keep in mind about the four main Adult ISA accounts.
The Cash ISA has been around since the introduction of the ISA in 1999, and it has become a household name.
With a low risk profile due to its status as a savings product and Financial Services Compensation Scheme (FSCS) protection up to the value of £85,000, the Cash ISA is an appropriate option for most – both cautious savers, and more experienced investors looking to have all-important cash reserves.
You can open a Cash ISA from the age of 16, and with both easy-access and fixed-term options, you can decide whether you want to have instant access to your funds, or whether you are willing and able to lock them away for a set period of time in favour of often higher returns.
Whilst the Cash ISA is protected in the event of provider failure and does not put capital at risk — all while rendering returns free from income and capital gains tax – its interest rates are at historical lows.
In response to the Coronavirus pandemic, the Bank of England cut its base rate to 0.1% in March 2020, and current Cash ISA rates are so low that capital held may have even decreased in value. Data shows that savers who subscribed £10,000 to the savings ISA 10 years ago would now have just £9,772.
Stocks and Shares ISA
The original investment ISA, the Stocks and Shares ISA allows investors to put their capital into a range of different investments – including individual shares, investment funds and investment trusts – whilst all potential returns are tax-free.
To open a Stocks and Shares ISA, you must be aged 18 or above, and it’s important to understand that capital is at risk and returns are not guaranteed.
Potential returns from a Stocks and Shares ISA are often in excess of 4%, and its risk profile is considered medium–high. With the stock market, it is advisable to be invested for the long-term – a minimum of five years – in order to allow time for falls in value to recover.
And whilst it’s crucial that investors expect fluctuations with a Stocks and Shares ISA, in recent times, the stock market has been exceptionally volatile. In March 2020, as the seriousness of the Coronavirus pandemic became apparent, the FTSE 100, Dow and S&P 500 suffered their steepest daily falls since 1987 – a situation which only worsened in the following weeks.
Though the stock markets began to recover, and the news of successful vaccines in particular helped to get things somewhat back on track, these fluctuations serve as proof of the volatile nature of a Stocks and Shares ISA.
Innovative Finance ISA (IFISA)
Along with the Lifetime ISA, the Innovative Finance ISA (IFISA) is one of the latest additions to the ISA market. Introduced in April 2016, the IFISA is open to experienced investors aged 18 or over who are interested in holding peer-to-peer loans and debt-based securities under the tax wrapper.
Like the Stocks and Shares ISA, the IFISA is an investment product whereby capital is at risk and returns are not guaranteed. With a risk profile of medium–high, an IFISA is best suited to sophisticated, professional and high-net-worth investors looking to maximise potential returns by taking more risks.
Within an IFISA, investors have opportunities to hold property bonds, SME loans, consumer loans and environmental projects in their portfolio, with potential returns often in the region of 4% to 8%.
As well as being uncorrelated to the fluctuations of the stock market and the Bank of England base rate – and therefore an important consideration for investors disillusioned with those – the IFISA provides the ability to invest for impact.
Whether it’s helping British business to progress, supporting small and medium-sized housebuilders in tackling the UK’s housing crisis, or backing crucial environmental initiatives, there is more to an IFISA than high potential financial returns.
Although prospective homeowners no longer have the option of opening the well-known Help-to-Buy ISA – as the account was closed to new savers on 30th November 2019 – the Lifetime ISA offers the same 25% Government bonus for first time buyers, not to mention it can also be used for the purpose of saving for retirement.
To open a Lifetime ISA, savers and investors must be between the ages of 18 and 39, and you are not able to make deposits after you turn 51. If you are not using the funds to buy a home, you can not access them without incurring penalties until you turn 60.
With a £4,000 annual subscription limit and maximum £1,000 Government bonus – on top of the tax-free returns that come as standard with an ISA – the Lifetime ISA is a valuable consideration for those looking to save for their first home or boost their retirement pots.
If you saved the maximum amount possible each year between the ages of 20 and 50, you could receive £30,000 in bonuses from the government. Or if the intention is to purchase a home with your Lifetime ISA funds and you save the maximum amount possible each year between the ages of 20 and 30, you would still receive a generous £10,000 in bonuses.
It is possible to open both a Cash Lifetime ISA and a Stocks and Shares Lifetime ISA, and each will have the same risk–return profiles of their standalone counterparts.
Choosing an ISA
With multiple options to choose from, choosing an ISA can be a difficult decision. Each type of ISA has its place in the market – the Cash ISA is important for instant-access cash, whilst the IFISA can be a good choice for experienced investors looking to provide a positive impact through their investments.
Seeking independent advice is crucial, as the best ISA for you will depend on personal circumstances and goals, but understanding each ISA and what they have to offer means you’re in a good position when the time comes to begin allocating your ISA allowance.