Individual Savings Accounts: An Overview - Part 2 of 3
For part two, we'll be exploring the Innovative Finance (IFISA), Junior (JISA), Inheritance, and Flexible ISA, along with a few of the finer details of each.
Innovative Finance (IFISA)
The Innovative Finance ISA is a little unique when compared against the other offerings here - purely because you're not investing your money through the bank. An IFISA consists of peer-to-peer loans- rather than cash or stocks and shares. The idea behind them is that you are matched up with investors who are willing to lend, with the advantage that you're likely to get a higher interest rate than you would with a regular savings account.
It's also worth bearing in mind a few risks with Innovative Finance ISA:
- They are not covered by the Financial Services Compensation Scheme (FSCS) where you're protected for accounts with funds of up to £85,000.
- They are also not covered by the investing portion of the FSCS scheme which protects you for up to a total of £50,000 in the scenario that the investing platform you chose goes south or hasn't handled your money appropriately.
If you're okay with the risks and the IFISA sounds like something that'd interest you, then you can find a list of providers here.
A Junior ISA is a tax-free Investment Savings Account for children under the age of 18. You can add up to a maximum of £4,260 a year to your child's account for the 2018-19 tax year,and the account is excluded from capital gains tax. For the 2019-20 tax year, the amount you can contribute for the year will increase to a total of £4,368.
With a JISA, you have the option of a regular cash ISA (where you simply put money into the account and it will gain interest). Alternatively, you can also open a Stocks and Shares Junior ISA if you think you'll get better returns.
You can open an account for your child if they are born after the 3rd of January 2011 or before the 31st of August 2002. If your child is currently 16 or 17, it is possible to claim two ISA allowances if they have a JISA as well as a regular adult cash ISA (for a total of £24,260, or £24,368 for the 2019 tax year).
It's possible to have more than one JISA but only one of each type (one cash, one stocks and shares). However, if you have already set up a Child Trust Fund, then they are not eligible to open a Junior ISA at the same time unless you transfer the funds from the Trust Fund into the Junior ISA.
Although the name suggests an inheritance from parents or other relatives, an inheritance ISA is the term that some providers use to describe an ISA of a deceased spouse. In cases such as these, the amount in the deceased spouses' ISA can be added to the living spouses' allowance for the current tax year.
This ISA is an off-shoot of the cash and stocks and shares ISA, with slightly different rules that permit being able to add funds, withdraw the funds, and then add them back without it being counted as part of the yearly contribution allowance.
Only certain providers offer some form of flexibility in their ISA, and it isn't something that is a rule of every ISA. It's just a nice to have, rather than a given.
Options of ISAs that can be flexible are cash, cash elements of stocks and shares ISA, and Innovative Finance. By their nature, Junior, Help-to-Buy, Lifetime, and any parts of Stocks and Shares that aren't cash (shares, bonds etc) cannot be flexible.
How flexible are they, and how does it work?
In reality, it depends on which tax year you're withdrawing and putting back from, as well as how many ISAs you already have open.
- If your ISA just has funds that are made up from prior tax years:
Then it's very straightforward. Whatever you take out can go back into the same ISA. Provided it all happens within the same tax year, it'll be considered replacing the cash without eating up any of your allowance for the current tax year. The catch is that you can't put more back in than the amount you took out- if you wanted to add more you'd need to open another ISA.
- If the ISA consists of money from only the current tax year:
Any funds withdrawn and replaced by the end of the tax year (the 5th of April) won't count towards your allowance for the current year. As an example, if you had £7,000 in a cash ISA and withdrew £4,000 then you could add a maximum amount of £17,000 back in (the original £4,000 withdrawn earlier plus the rest of the yearly allowance of £13,000).
- If your ISA funds are a combination of money from previous tax years and the current tax year:
Any withdrawals made will be considered as coming out of the current tax year allowance. If you withdraw more funds than you've put in for the current tax year, then anything over that amount will be handled as being from prior years.
This works in reverse when it comes to adding the cash back in - any money put back is treated as topping up previous years and if the amount put back exceeds those previous years, only then is it considered as replacing money for the current year. Of course, this all has to happen within the same year you withdrew from the ISA.
The general rule is that you must place money back into the same ISA that you withdrew from unless:
You're withdrawing all the funds, meaning that the account closes automatically. You can then open another cash ISA to deposit into (so long as it's your only cash ISA opened within the current tax year- if it isn't then you have to wait)
You're depositing into a different type of ISA, e.g. you withdraw cash from your cash ISA and then put the money back into the cash element of a Stocks and Shares ISA.
Our final part of the ISA series will be a Q&A about which could be best suited to you, some of the rules and regulations about mixing different types of ISA within one account- or having more than one open at a time. You can read it here in Part 3.