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How to make ISAs work for you

Make the most of your tax allowances by using the different types of ISAs that are available.

Individual Savings Accounts (ISAs) were first introduced in 1999 and are a tax-free way to save into a cash savings or investment account. There lots of different types of ISA available, but the right one for you will depend on your financial goals. We explain how they work so you can choose the one that is best for you.

Cash ISA
A cash ISA works in the same way as traditional savings account but you won’t have to pay tax on any of the interest you earn.

For the 2021-22 tax year each person has an ISA allowance of £20,000. To take out a cash ISA you have to be a UK resident and over the age of 16. If you don’t use the allowance before the end of the tax year you will lose it and you’ll have to start anew on 6 April.

Some cash ISAs are instant access while others have a fixed rate. You can only open one cash ISA per year but you are allowed to transfer to another cash ISA or a stocks and shares ISA with another provider if you want to.Stocks and shares ISAs

With a stocks and shares ISA you can hold a variety of investments such as shares, bonds and funds. Just like the cash ISA you can save up to £20,000 a year tax free, but you get to choose what investments you put inside it, so it’s worth getting financial advice. You also have to be 18 or over to be eligible.

Stocks and shares ISAs provide an option for people looking to avoid the erosive impact of inflation on returns. Over time there is the potential for better returns with an investment ISA over cash, although the risks are also greater.

If you want to invest in a stocks and shares ISA you need to be comfortable with the possibility of making losses and prepared to invest for the longer term.

Lifetime ISA
The lifetime ISA (LISA) can be used by first-time buyers to fund a deposit for a property or taken tax-free at the age of 60. As well as paying interest, LISAs benefit from a 25% bonus from the government to encourage saving towards a home or retirement.

The maximum you can put in each year is £4,000, which comes out of your £20,000 ISA allowance. The LISA can only be opened by anyone aged 18–39, but you can keep saving in one until you are 50.

With the LISA, you can get a bonus of up to £1,000 a year up until you are 50. If you open one at the age of 18, this means you could end up with a maximum bonus of £32,000.

However, there are some restrictions with a LISA. You have to keep your money in a LISA for a minimum of one year before you can withdraw it and if you take your money out before you are 60 and you don’t use it to buy a home, you will have to pay a 25% penalty.

Junior ISAs
If you’re looking to put some cash aside for your kids, Junior ISAs (JISAs) are a great way of doing so. These accounts are available to anyone under 18 and tend to offer much higher rates than adult accounts, but there are some restrictions.

Like the adult accounts, you won’t pay any tax on your interest. In the 2019–20 tax year you can save or invest up to £9,000 in a JISA. You can save for your child either in a cash JISA, a stocks and shares JISA, or a combination of the two. JISAs can be opened by parents with children aged under 16 and then by children themselves when they are aged 16 and 17.

Innovative Finance ISA
If you invest with an innovative finance ISA (IFISA) the company offering the ISA will use the money to lend to borrowers or businesses – known as peer-to-peer lending. You’ll be offered a rate of interest from the borrower when paying back the money you’ve invested.

You can invest up to £20,000 a year in an IFISA and any interest earned will not be taxed. While you can earn higher rates of interests than with a traditional savings account, they are a much riskier option than a cash ISA as the borrower could potentially default on their loan.

Our financial advisers can help you and your family find the right product to suit your needs and financial situation.

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.