The Individual Savings Account, better known as an ISA, was launched almost a quarter of a century ago, in 1999, and has been a success story in helping people save and invest for their future.

However, in recent years the ISA landscape has been a bit more cluttered than it used to be, with new types of ISAs being added to the line-up. AJ Bell has called for the government to simplify the ISA landscape and roll all existing ISAs into one.

We’ll see how that goes, but in the meantime, here are a few pointers on which ISAs are best suited to which savings needs, though much will depend on personal circumstances.

STOCKS AND SHARES ISA

The Stocks and Shares ISA is a tax-efficient and flexible wrapper which you can use to grow your wealth and protect it from inflation.

It can be used for a variety of longer-term investment goals, such as saving for school or university fees, to pay off a mortgage, or to boost your retirement fund.

There are a wide range of investments you can choose from, including funds, shares, investment trusts, bonds and cash, so this ISA can be calibrated to your tolerance for risk and your appetite for growth.

Using your stocks and shares ISA allowance to shelter your investments has never been more important because the Chancellor has taken an axe to tax-free dividend and capital gains allowances. The annual dividend allowance has been cut from £2,000 last tax year to £1,000 this year and £500 next year, and the capital gains tax allowance has been cut from £12,300 last year to £6,000 this year and £3,000 next year.

CASH ISAS

Cash ISAs are much maligned nowadays, as their raison d’être has been somewhat undermined by the introduction of the personal savings allowance, which allows basic rate taxpayers to receive £1,000 of interest tax-free every year.

Higher rate taxpayers can only receive £500 of annual interest before paying tax though, and additional rate taxpayers pay tax on all their interest, so a Cash ISA can still be a useful port of call for higher earners, or even basic rate taxpayers who have large sums sitting in cash.

Rising interest rates also now mean that savers are more at risk of breaching their annual tax-free savings allowance because of bigger cash interest payments.

Cash ISAs are not very flexible in that they can only ever hold cash, but this does make them good for storing money that 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, though over time it may be vulnerable to the effects of inflation, if prices are rising faster than the interest rate your Cash ISA is paying.

LIFETIME ISA

The Lifetime ISA is a fairly new addition to the ISA family and comes in 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 comes with strings attached though.

The ISA can only be used to fund a first house purchase, or else drawn after the age of 60, otherwise there is a penalty for withdrawal. This makes the Lifetime ISA more appropriate for those saving up for a house deposit or for retirement.

It’s also an ISA for younger people because it comes with age restrictions. Only those between 18 and 50 can contribute, and they must have set up the account before they turn 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 they are using it to fund
their retirement.

JUNIOR ISA

Junior ISAs allow parents, grandparents or anyone else who feels inclined to contribute to an ISA for a child, up to £9,000 a year.

The child can start to manage the Junior ISA from age 16 and gets access to it from age 18, so it can be used to help them through university, travel during a gap year, or go towards a house deposit, for example.

There are both cash and stocks and shares Junior ISAs available, with many parents opting for the cash option. However, given the long-term investment horizon most children would have, it makes a lot of sense for parents to consider the stocks and shares route.

There is also a bit of a loophole in the rules which means children between the age of 16 and 18 can apply for a £9,000 Junior ISA and a £20,000 adult cash ISA at the same time, providing them with a £29,000 total ISA allowance, the biggest allowance anyone at any age receives.

INNOVATIVE FINANCE ISA

The Innovative Finance ISA was launched to help provide a boost to the peer-to-leer lending industry, but it now looks like a busted flush. HMRC figures show that last year these accounted for only 0.13% of ISAs contributed to, so they are a niche product, and are likely to become even less appealing now savers can get more reasonable rates from traditional savings accounts.

If you are interested in peer-to-peer lending and want to protect your interest from tax though, an Innovative Finance ISA can help.

HELP TO BUY ISA

The final product in the ISA line-up is the Help to Buy ISA. This was initially set up to provide 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, so an annual total of £2,400 rather than £4,000, and there is 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, though if you already have one you can still contribute until 2029.

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