ISAs shelter your returns on savings or investments from tax, and from April this year (2016) there will be three main types: the cash ISA, the stocks and shares ISA, and the Innovative Finance ISA, which allows you to get tax-free returns with peer-to-peer lending. Here we have a look at the benefits of each type of ISA.
Benefits of a Cash ISA
Save with access to your money: If you would like to be able to make withdrawals from your savings whenever you need, try an easy-access cash ISA. The downside is that rates are typically the lowest out of all the ISAs (usually not above 2.5%*) and that they are variable, sometimes decreasing if you make a number of withdrawals.
You want to keep your money safe for longer with a better return: Rates for fixed-rate cash ISAs are better than easy-access accounts, typically around 2-3%. Your money is locked at a fixed rate for a specified time period, usually between 1 and 5 years, with higher rates for longer terms.
Benefits of a Stocks and Shares ISA
You have spare money to invest over a long time: If you’re unimpressed by cash ISA rates and you’re interested in learning how to manage your investments, a stocks and shares ISA could be right for you. You must be willing to accept the higher risk, and to research which investments are worthwhile or get a professional to invest for you. There is no guarantee you will receive dividends or the same amount of principal back, but investing in shares over a long period of time has the potential to earn you considerably more – according to research conducted by Moneyfacts.co.uk, the average return for a stocks and shares ISA in the 2014/15 tax year was 7.4%*.
Benefits of an Innovative Finance ISA
You want higher returns and aren’t put off by risk: Peer-to-peer returns will be included in the Innovative Finance ISA from April 2016. This investment option typically offers a rate between 5-10%* and attracts investors who are not satisfied with cash savings rates and are prepared to take risks for potentially higher returns. As with investing in shares, there is no guarantee that you will receive all of your money back if individuals or businesses you lend to do not repay their loans. Peer-to-peer is not protected by the Financial Services Compensation Scheme like cash ISA savings are, although some platforms have some funds put aside to cover investor losses in the case of borrower defaults. Peer-to-peer should be used alongside less risky investments, and investors should spread their capital over many different loans to protect their overall return rate from individual borrowers defaulting on their loan
Benefits of Other ISA Types
You want to buy your first home: Help to Buy ISAs are a type of cash ISA launched in late 2015. If you are a first-time buyer saving towards buying a home, the government will boost your savings by 25% up to a bonus limit of £3,000. If you are buying a home with someone else you can each open a Help to Buy ISA, allowing you to receive a bonus of £6,000 if you buy with a partner.
Save money for your children: Junior ISAs allow you to save or invest money for your child, which they can access when they’re 18. You can choose a cash Junior ISA or a stocks and shares Junior ISA depending on whether you wish to save or invest up to a limit of £4080 per year. The Innovative Finance ISA may also be available in Junior ISA form after its launch.
Split your ISA allowance between different types: While you are only able to open one of each type of ISA within a tax year, you can mix and match between cash, stocks and shares, and the Innovative Finance ISA in any combination as long as your combined savings in any type of ISA do not exceed the ISA limit for a year, which is currently £15,240.
*All figures correct as of March 2016