Individual Savings Accounts: An Overview - Part 1 of 3
With many different types of Individual Savings Accounts on offer these days, it can all be a bit confusing when you sit down and try and figure out what's what, or what the best route to take might be. Fear not, this roundup should hopefully make things a bit clearer so you know your options.
This is blog 1 of 3, in which we’ll be looking at Cash, Stocks and Shares (S&S), Help-to-buy, and Lifetime Individual Saving Accounts.
If you're interested in the Junior, Inheritance, or Flexible Savings Accounts then you can find them here in Part 2. Finally, in the last of the series we’ll do a bit of a Q&A going over combinations of different ISA types, and which ISAs are worth your while over some other choices- depending on your needs. If you're a bit more clued up on the different ISA options, but just wanted to learn more about how they can work together, then head over to Part 3 to find out more.
Before we get into the different types of ISA, it's probably a good idea to explain what they are, just so you're all caught up. An Investment Savings Account (ISA), is a savings account that you don't have to pay tax on (within reason). The differences between ISAs are how they're made up - or what their uses are for.
With that out of the way, let’s get right into it:
A rundown of account types
A cash ISA in practice functions exactly the same as a regular savings account. The main difference is that you don't pay any tax on the interest you earn whilst the money is in the ISA.
For the current year of 2018/2019, you can save a maximum of £20,000. The year that you can put money into an ISA is defined as April - April of each year.
The interest rates of ISAs vary, so it's worth shopping around to see who will give you the best deal. And if at any time you spot a better deal, you can always switch providers. It's also worth bearing in mind that a better interest rate might have conditions such as leaving the money alone for a set period of time (e.g. 2% interest if the money is left for 3 years).
Stocks and Shares (S&S)
A stocks and shares ISA might be a better long-term strategy (depending on how much risk you're comfortable with), especially if you know you won't need the money for something in the near future. Of course, what you make depends on how well the shares perform - meaning that the value of your ISA can go down rather than up.
Launched in December of 2015, the help-to-buy ISA was meant to help first time home buyers "skip a rung" on the property ladder and relieve a bit of pressure with saving for a mortgage. Anything you save won't be taxed and you can put up to £200 per month into the account. In the first month of opening the account, you can also deposit an additional £1000, for a total of £1200.
For every £200 you save, the government will add an additional £50 up to total savings amounts of £12,000.
In practice, the government will lend you up to 20% of the value of your newly built home (with no fees on the loan for the first 5 years of you owning your property) meaning you need a 5% deposit, and a 75% mortgage. If you're in Greater London, then the government will lend 40% of the value, rather than 20%.
For example, if you were looking at purchasing a property with a value of £230,000, then you'd be putting a deposit of £11,500 down, get a loan of £46,000 (government lending of 20%), and a mortgage for the remaining 75% (£172,500).
the Lifetime ISA was introduced in April 2017, after some backlash towards the government surrounding the Help-to-buy ISA. The ISA can be used for both saving a deposit on a property as well as saving for retirement later on. The announcement of the scheme was fairly quiet, so it may very well have passed you by (like it did a lot of us).
The limits for the Lifetime ISA are considerably higher when compared to the help-to-buy ISA (£4000 a year vs £2400). The property value you can use the funds towards are also considerably higher - £450,000 vs £250,000. This is useful for those who are outside London, yet still in a high cost of living area where £250,000 doesn't get you so far.
If you're using a LISA to buy property, then you have to be aware that you can't use it to purchase a buy-to-let property (so no renting it), and the property you do buy must have a mortgage. If you're using it for retirement, then keep in mind that if you don't wait till 60 to withdraw the funds then there's a 25% charge on the total amount you withdraw.
To learn more about LISA., head over to our dictionary entry.