What is an ISA (Individual Savings Account)?
What is an Individual Savings Account (ISA)? – This guide aims to highlight the knowledge you need to start out in the world of saving. One of the best ways to save your money (usually) risk-free is to open what’s known as an ISA account. To do this, we’ll take you through step-by-step how they work- so let’s start at the beginning…
What is an ISA?
In short, an ISA is an Individual Savings Account. The saving part being the highlight here.
How is an ISA different from any other savings account?
The main benefit to choosing an ISA over any other form of savings account is the tax-free interest you ‘earn’ just by putting your funds in one. You’re essentially being paid a small % of your savings, to save using that account.
Tax-free? Free money? What’s not to love?
Well, unfortunately there are a few conditions you’ll need to watch out for;
Firstly, you have a limit to how much money you can save in your ISA in each tax year. The ISA ‘allowance’ for the 2020/21 tax year is £20,000. If you’re a small time saver, it’s not too bad, but if you’re sitting on some serious cash, you may want to look elsewhere.
Next, there’s often a limit on the access you get to the funds you’ve chosen to save. Whilst this isn’t the case for all accounts, the ones with the most favourable interest rates usually require you to lock your money away for 12-24 months, meaning you can’t touch it (or if you can, you might have to pay a hefty fee).
It’s not all doom and gloom, however, as you can open multiple different ISA accounts, all with different terms and conditions, allowing you to benefit from the varying choices on offer (again, as long as your total investment across all accounts together never exceeds £20,000).
What types of Individual Savings Account can I open?
There’s multiple different types of ISA accounts on the market, however the main three you tend to find widely available are;
The ‘standard’ ISA you usually see advertised.
You put your money in and it builds some interest. Very simple. These accounts have terms that vary between allowing you to access your money whenever you want, to accounts where you are asked to lock away your cash for a fixed amount of time. If you’re looking to get started with saving, and want to dip your toe in… this may be a good place to start.
Stocks and shares ISA
The second type of common ISA you’ll see advertised.
The key change here is that you can choose to invest your money in different stocks, shares, bonds etc, which will allow you to make often larger (albeit also riskier) gains tax-free. These accounts usually come with a fee, as the investments may be managed for you by your ISA account provider, though there are vendors who also allow you to make the investment choices yourself.
BE WARNED: As you’re investing your money, you may lose some or all of your cash if the investments don’t go your way. Whilst you could be making sizeable tax-free gains, you could also be losing a significant amount of the money you put in. If you’re happy to take your chances, this could be a great option for you.
A great way to get yourself started with a Tax-Free stocks and shares ISA account is to get yourself started on a platform such as Trading212, this is our platform of choice for someone that’s just starting out, and, as an added perk, there is an ongoing promotion, where you get a FREE SHARE, worth up to £100!
Lifetime ISA (LISA)
The slightly left-field ISA.
A LISA is a special type of ISA, as it’s a government-backed initiative to help people aged 18-39 to either buy their first home (up to a value of £450,000) or save for retirement.
This is where it get’s slightly complicated. The LISA initiative states that the government will supplement your yearly savings by 25%, up to a total £4,000 each year. This means you could get an extra £1,000 a year just for using this ISA! Even better, you still get interest on all the savings you put in too, which over a few years could really build up. You’re allowed to deposit money until the page of 50, but (for the retirement option) must wait until you’re 60 to withdraw.
The real downsides here are that you can’t access the money without paying a whopping 25% penalty unless you either buy your first home, or retire (or die but we won’t get into that). If you’re looking for a long term option, this may be the one for you.
Hopefully now you’ve got your bearings in the world of ISAs; let us know in the comments what experiences you’ve had with them! Found any good ones in the era of notoriously bad interest rates? Share all below…