Launched in 1999, Individual Savings Accounts (ISAs) have helped millions save and invest for their futures. However, in recent years the ISA landscape has become more cluttered than it used to be, with many new ISA types joining the line-up.
So, which could be right for you? In this article, we’ll walk you through all the different sorts of ISAs and weigh up the pros and cons to help you decide.
Stocks and shares ISA
The Stocks and shares ISA is also called an investment ISA. It’s a tax-efficient and flexible account that could grow your wealth and protect it from inflation. You can use a Stocks and shares ISA for a variety of longer-term goals, such as investing for school or university fees, to pay off a mortgage, or to boost your retirement pot.
There are a wide range of investments to choose from, including funds, shares, investment trusts, bonds and ETFs. That means you can build your portfolio in a way that suits your tolerance for risk and appetite for growth. Using your to shelter your investments is important because tax-free dividend and capital gains allowances are constantly changing.
Stocks and shares ISAs are well suited for:
- Saving for retirement (a ‘side car’ for your pension)
- Saving for school or university fees
- Saving to pay off a mortgage
- Saving to build up financial resilience in the medium/long term
- Saving the tax-free cash lump sums you withdraw from your pensions
- Saving over and above short-term spending needs
Read about our Stocks and shares ISA
Lifetime ISA
The Lifetime ISA is a fairly new addition to the ISA family, and comes in both Stocks and shares and Cash flavours. The attraction of this ISA is the government bonus of 25%, up to a maximum of £1,000 a year.
This top-up comes with strings attached, though. You can freely access your Lifetime ISA only when you’re buying your first house, or you’re age 60 or older – otherwise you’ll need to pay a withdrawal penalty. This makes a Lifetime ISA appropriate if you’re saving up for a house deposit or for retirement, but not if you need to get your hands on your cash in the short term.
It’s also an ISA for younger people. You need to be aged between 18 and 50 to pay into a Lifetime ISA, and you need to open your account before age 40. Higher earners and those who aren’t maximising employer pension contributions might be better off adding more to their pension rather than saving in a Lifetime ISA, though, if you’re planning on using it to save for retirement.
Lifetime ISAs are well-suited for:
- Saving for retirement
- Saving for a house deposit
Cash ISA
You can only use Cash ISAs to hold cash (as their name suggests). But this also makes them handy for storing money you might need at the drop of a hat. That’s because the value of your Cash ISA will never fall, unlike a Stocks and shares ISA. Over time, however, a Cash ISA may be vulnerable to the effects of inflation, if prices are rising faster than the interest rate it’s paying you.
For longer-term savings, a Cash ISA is likely to provide lower returns than a Stocks and shares ISA. Data from the Barclays Equity Gilt study shows that over a ten-year period, UK shares have a 91% chance of beating cash. See how you could benefit from interest rates in a Stocks and shares ISA.
Cash ISAs are well suited for:
- Building up a rainy-day fund
- Saving for short-term spending needs (if you need the money in the next five years or so)
- Storing cash when interest rates or inflation is high
Cash ISA vs Stocks and shares ISA
Junior ISA
A Junior ISA is an ISA for a child. Handily, anyone – be they parents, grandparents or family friends – can pay into a child’s Junior ISA, up to a total of £9,000 a year.
From age 16, the child can start to manage their Junior ISA themselves, and they get full access to it at age 18. That means the account can help them through university, travel during a gap year, or be put towards a house deposit.
Both Cash and Stocks and shares Junior ISAs are available. Many parents opt for the cash option, but given children’s long-term investment horizon, it makes a lot of sense to consider the Stocks and shares route.
Junior ISAs are well-suited for:
- Saving for university fees and costs
- Saving for a gap year
- Saving for a first house deposit
- Giving young adults a head start and an understanding of the benefits of saving
Innovative Finance ISA
The Innovative Finance ISA was launched to give the peer-to-leer lending industry a boost, but it now looks like a busted flush. According to HMRC figures from 2022, Innovative Finance ISAs accounted for only 0.13% of ISA contributions. So, they really are a niche product, and likely to become even less appealing now that savers can earn more reasonable rates from traditional savings accounts.
That said, if you’re interested in peer-to-peer lending and want to protect your interest from tax, an Innovative Finance ISA could be the way to go.
Innovative Finance ISAs are well-suited to:
- Those who invest in peer-to-peer lending products and want to shelter their interest from tax
Help to Buy ISA
The final product in the ISA line-up is the Help to Buy ISA. This one was launched to give a 25% government top-up for first time buyers saving for a house deposit. Unlike the Lifetime ISA, you can only pay in £200 a month – meaning an annual total of £2,400 rather than £4,000 – and there’s a cap on the total government top-up of £3,000.
However, the Help to Buy ISA has now been superseded by the Lifetime ISA, and you can no longer open one. But if you already have one, you can still contribute to it until 2029.
You might save into an existing Help to Buy ISA over a Lifetime ISA if:
- You don’t have a Lifetime ISA already and plan to buy a house in the next 12 months – this is how long a Lifetime ISA account needs to be open before you can claim the bonus to buy a house
- You fall outside the age limits for a Lifetime ISA
However, there are some downsides to keeping a Help to Buy ISA:
- Outside of London, your house purchase is capped at £250,000 rather than £450,000 for the Lifetime ISA
- The house purchase must be made by 30 November 2030 to receive the bonus
- You’re limited to a maximum saving of £12,000
- You can’t claim a bonus if saving for retirement
Interested in transferring?
Transfer your H2B ISA to our Lifetime ISA
So, which ISA is right for you?
Hopefully, after comparing ISAs, you’ll have more of an idea of which could work for you. Each offers ways of boosting your savings that suit different goals – whether you’re simply putting money away for a rainy day or an expensive purchase, or you’re saving towards your retirement or future home. Just make sure you’ve read the criteria thoroughly and understand the risks and implications of each ISA type before opening an account.
You can find more information about our ISAs on each product page. Please note, we don’t offer Cash, Help to Buy or Innovative Finance ISAs at AJ Bell.
Important information: ISA rules apply. Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser.
These articles are for information purposes only and are not a personal recommendation or advice.
Did you know there are limits on how many ISAs you can pay into, and when? Read to learn more.
An AJ Bell investment ISA is an easy, tax-free and efficient way to invest - so more of what you make stays in your pocket.
Related content
- Fri, 23/02/2024 - 17:03
- Fri, 23/02/2024 - 16:33
- Fri, 23/02/2024 - 15:28
- Fri, 23/02/2024 - 11:59
- Wed, 21/02/2024 - 08:53