Individual Savings Accounts, better known as ISAs, have been around for more than 20 years and have become an integral way to save. ISAs let you save money and earn interest without paying any tax on what you earn. You’ll be given an allowance for every tax year, usually up to £20,000, which you can put into a number of different types of ISA.
For most ISAs you must be at least 16-years-old to be eligible and be a resident of the UK, or what is known as a crown servant, for example, someone who works for the government overseas (click here for full criteria). However, there are options for junior savers, which you will see below.
There are four types of ISAs:
You can put money into one of each kind of ISA each tax year. So, for example, you could take the £20,000 tax-free allowance for this year and divide up into each of the four different types, although you’re only allowed to pay £4,000 into a Lifetime ISA in a tax year, which runs from 6 April to 5 April.
You don’t pay tax on interest from an ISA, or income or capital gains tax on interest from investments in an ISA.
An ISA doesn’t close at the end of a tax year; you’ll keep the savings on a tax-free basis for as long as you keep the money in your ISA(s).
Cash ISAs are probably the most common type of ISAs. They usually come with easy access that allow you to make withdrawals (although you might lose a set number of days interest on the amount you withdraw), or with limited access where you leave your savings in place for a set period.
There are also fixed rate ISAs, which set a fixed interest rate for a defined period of time, and which usually reward savers with higher interest rates for leaving the savings intact.
You’ll usually get a higher rate of interest if you lock your money away without withdrawing it.
This type of ISA gives you tax-free returns on stocks and shares investments, with the investment decisions being taken care of by a fund manager. There is also a self-select version of a stocks and shares ISA where you make your own investment choices instead of a fund manager.
The thing to remember about stocks and shares is the value of your ISA could vary depending on economic and, these days, world circumstances.
You have to be aged over 18 to open this type of ISA.
Possibly the least well-known type of ISA, often known as a IFISA, this allows you to earn tax-free interest on peer-to-peer loans (known as P2P lending).
P2P lending is a form of investing where you lend money directly to borrowers and businesses and they then pay back the borrowed amount, with interest on top. The interest they pay is the return you get on your investment. You earn this interest tax-free.
You can use a Lifetime ISA, sometimes known as a LISA, to buy your first home or save for later life. You must be aged 18 or over but under 40 to open a LISA, and you can pay in a maximum of £4,000 a year until you’re 50 (the first payment in has to be made before your reach 40).
A LISA can take the form of a cash ISA or a stock and shares ISA, or a combination of both, and the government adds a 25 per cent bonus to your savings, up to a maximum of £1,000 a year until you reach the age of 50, which is the limit you can pay into a LISA. However, you can keep your LISA open beyond the age of 50 to still earn interest or investment returns.
There are some criteria if you’re using your LISA to help you buy your first home:
If you’re buying with someone else and they have a LISA, they can use their savings and government bonus too.
Lifetime ISAs replaced the Help to Buy ISA, which is no longer available to open, although if you already have one you can still use the savings towards a house purchase subject to certain criteria:
A junior ISA is a permanently tax-free savings or investment account aimed at encouraging families to save for their children’s futures. Any money you put in to one will be locked away until your child’s 18th birthday, when it becomes their cash and when it will become a standard ISA. Junior ISAs come in cash, and stocks and shares variations, and you can pay in up to £9,000 in a tax year.
You can transfer an ISA from one provider to another at any time you choose, and change the type of ISA you’re placing your money in.
If you transfer cash and assets from a Lifetime ISA to a different ISA before the age of 60 you’ll have to pay a withdrawal fee of 25 per cent.
If you transfer cash from your Innovative Finance ISA to another provider you may not be able to transfer other investments. Check with the provider.
If you want to switch ISAs, contact the provider you want to move to and fill out an ISA transfer form.
Chorley Building Society has a great range of savings products for everyone, from young children to older savers.
You can view our range of ISAs and other savings products here. You can talk to a member of our Savings team on 01257 230 003