What is the best type of ISA?

Individual Savings Accounts (ISAs) are one of the big investment stories of the past 20 years.

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They were introduced in 1999 to encourage saving and investment, and they offer generous tax breaks, so that, through an ISA, you can invest up to £20,000 in the 2019/20 tax year without paying tax on the investments.

That’s a pretty big incentive, so it’s not surprising that ISAs have proved to be so popular. 

There are now seven types of ISA accounts; 

  • Cash ISA (instant-access, fixed-rate and flexible) 
  • Stocks and Shares ISA
  • Innovatice Finance ISA (IFISA)
  • Junior ISA
  • Inheritance ISA
  • Help To Buy ISA
  • Flexible ISA
  • Lifetime ISA

Five of these are for specific investment circumstances, so we’ll just look at the first three - Cash ISAs, Stocks and Shares ISAs and IFISAs. 


What is a Cash ISA?

Cash ISAs are a type of savings account in which you receive tax free interest.

There are three types of Cash ISA;

  • Instant-access
  • Fixed-rate
  • Flexible

Instant-access Cash ISAs do what they say on the tin - you are able to access your money instantly, whenever you want. 

On the other hand, with a fixed-rate Cash ISA, you commit to locking your money away for a fixed term, typically between one and five years. This means that you get a fixed-rate of interest, and this interest will usually be higher than you would get with an instant-access Cash ISA.

Flexible Cash ISAs allow you to withdraw and replace money from your Cash ISA within the same tax year without it affecting your annual ISA allowance. 

Help to Buy ISAs are also classed as Cash ISAs, though these work very differently to those mentioned above. Find out more about Help to Buy ISAs here


What is a Stocks and Shares ISA?

With a Stocks and Shares ISA, your money is invested in company shares and government and corporate bonds. Your investment can earn a tax free return from capital gains, dividend income and interest payments.


What is an IFISA?

Innovative Finance ISAs (IFISA) enable you to lend funds through the peer-to-peer (P2P) lending market while benefiting from a tax-wrapper, meaning you receive tax free interest and tax free capital gains. 


Which is the most secure ISA?

Generally speaking, the most secure ISA is the Cash ISA. This is because - as long as you open your Cash ISA with a bank that is authorised by the Financial Conduct Authority (FCA) -  they’re protected by the Financial Service Compensation Scheme (FSCS) for up to £85,000. So compared to a stocks and shares ISA, investors don’t need to fear a company going bust or doing so badly that it can’t pay a dividend. 

A fixed-rate Cash ISA will pay a better rate of interest than an instant-access Cash ISA, but there is a slightly greater risk. Inflation might rise above the fixed-rate, so the value of the capital is eroded, or market rates might rise above the rate you are tied to, so you lose out.

Stocks and Shares ISAs can offer greater returns, particularly when stock markets are rising, but as we’ve seen, that’s not always the case and the investor can suffer serious short term losses.

IFISAs sit between Cash ISAs and Stocks and Shares ISAs in their balance between risk and return. 

They’ll usually pay a better rate of return than a Cash ISA, while having a greater element of risk. On the other hand, they can be more secure than a Stocks and Shares ISA, even if they tend to pay a lower rate of return. 

Also, property bonds held in an IFISA may be secured against the asset whose acquisition or development they were issued to fund. 

However, even if an IFISA is asset-backed, an economic downturn could affect returns and you may not get back the amount invested. In the event of default, the security held doesn't guarantee the return of your capital, and enforcing your security may take time and your returns may be delayed. 

It’s also important to note that IFISAs are not covered by the FSCS.


Which is the best ISA for investing?

Though Cash ISAs are the most secure ISA, within one, your money will only earn around the market rate of interest, which is currently at an all time  low. Therefore, IFISAs and Stocks and Shares ISAs will usually be a better choice for investing. 

IFISAs are a great tool for investing as they offer better returns than Cash ISAs, while presenting more assurances in regards to security than Stocks and Shares ISAs. 

IFISAs can be used to lend funds through the P2P lending market and buy other debt based securities, while benefiting from the ISA tax advantages. 


Which is the best ISA for you?

This is one of those questions for which there isn’t a single, definitive right answer. The best ISA for you depends on your individual circumstances and what you’re looking for in your investment goals.

For example, if you think you might need access to your money at short notice, then fixed-term Cash ISAs and IFISAs are probably not for you - but you may want to consider an instant-access Cash ISA, where you can withdraw your money as and when you need it. However, with interest rates at an all time low, it’s important to shop around to make sure your money is working as hard as possible. 

Usually, one of the most important considerations is your risk profile. 

People have different attitudes to risk, which vary according to personality, circumstances and goals. It’s important that you base your investment choices around your risk profile and always seek the advice of an independent financial specialist where possible before making investments. 

There are also some limitations in regards to eligibility that need to be considered. Rules introduced by the Financial Conduct Authority (FCA) state that everyday (restricted) investors who are new to the sector can only invest 10% of their investible assets into P2P agreements, and only experienced investors (sophisticated or high-net-worth individuals) can invest into mini-bonds. 


The Innovative Finance ISA Guide

The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).


Originally published 20th August 2019, updated 16th December 2019.