ISA is basically a tax-free home for your savings.
It's a type of account that works like a wrapper. You can put a range of different investments inside it: they all then benefit from tax-free growth.
The right Isa for you depends on your age, savings goals and attitude to risk.
ISA is generally of various types
1. Cash Isas
2. Stocks and Shares Isas
3. Innovative finance Isas
4. Junior Isas
5. Help to Buy Isas
6. Flexible Isas
7. Lifetime Isa(available from 2017)
Cash Isas
Anyone over the age of 16 can open a cash Isa.
Account holders get an annual allowance - for the 2016/17 tax year you can pay in £15,240.
This is set to increase to £20,000 in April 2017.
You can hold many cash Isas but you can only open and pay into one, each tax year.
Old Isas can sometimes (but not always) be transferred into new accounts without affecting your annual allowance. To do this, you need to complete a transfer form which you can do from your existing provider. If you simply withdraw the funds from your old Isa and pay it into the new one, it will count towards your year’s subscription.
Stocks and Shares Isas
A stocks and shares Isa allows account holders to put their £15,240 into a range of different investments including shares, funds, corporate bonds and more.
You must be over 18 and a UK resident.
Customers have the opportunity to earn higher returns with a stocks and shares Isa than with a cash Isa, although there are higher risks to your capital.
There are also fees to consider.
These vary but you can expect to be charged a platform fee by the Isa provider, in addition to management fees for any fund purchased, and dealing fees for buying and selling shares.
For example, AXA Self Investor applies a 0.35pc fee for savers with up to £250,000 to invest, while AJ Bell charges 0.2pc plus a further £4.95 if you want to buy and sell more than 10 funds.
Any profits you make when selling investments investments inside a stocks and shares Isa are free from capital gains tax, which is useful for those who may breach the 2016/17 CGT allowance of £11,100.
For those not likely to breach the limit, an Isa is likely still the best way to start investing, as it means the growing portfolio is protected from tax in the long run when it may pose more of an issue.
Dividends earned within an Isa are also tax free.
Innovative finance Isas
The Innovative Finance Isa is the newest member of the Isa family – it only became available in April. However, only 10 providers are currently offering the Ifisa.
The Ifisa allows peer-to-peer investments up to £15,240 to be held in the Isa’s tax wrapper. Those who are comfortable taking more risk can lend cash to borrowers through P2P(Peer-to-peers) platforms and can earn between 5pc to 7pc.
Cash invested through these platforms are not protected like savings by the Financial Services Compensation Scheme which covers £75,000. If the borrowers cannot pay you back, you could lose your capital.
Most P2P platforms say they have cash pots to pay out from if things go wrong.
For example, Zopa’s “Safeguard” will cover losses – but only if it has “sufficient funds”. It also lends out money in small amounts which it claims reduces the risk.
However there is no guarantee that these contingency funds will deliver.
Money lent through P2P is locked away for a fixed term and you may have to pay an additional fee to withdraw funds early.
Junior Isas
Parents (or legal guardians) of children under 18 can open up a cash Jisa, a stocks and shares Jisa or split the £4,030 annual allowance between both. The account can be managed by the child when they turn 16 but withdrawals cannot be made until their 18th birthday.
Children aged 16 and 17 can open up their own Jisa as well as an adult cash Isa. They would then be entitled to the £4,080 allowance and will also be allowed to save a further £15,240 in the adult Isa, giving them the largest tax-free allowance of any age group.
Help to Buy Isas
Help to Buy Isas were introduced in December last year as a way to help first time buyers get on the property ladder.
Savers must be over the age of 16 to apply for the account. Along with up to 3pc interest, customers are entitled to a 25pc government bonus of up to £3,000 providing they meet the set criteria. Your solicitor will need to apply for this when the home purchase is almost completed.
Savers can deposit £1,200 in the first month and £200 a month thereafter. You must save at least £1,600 before claiming the government bonus.
To qualify for the bonus you must be in the UK and your home must cost up to £250,000 or £450,000 in London. It must also be bought with a mortgage. The property must be the only home you own and you must plan to live there.
Help to Buy Isas can only be opened by individuals but if you are buying a home with another first time buyer, you can both open an account and claim your own bonus.
You can only open one Help to Buy Isa but you can transfer the money to better paying provider.
Savers will be able to open a Help to Buy until November 30 2019. Bonuses must be claimed by 2030.
First time buyer used to be able to earn 4pc with an Help to Buy Isa but the rates have come crashing down.
Halifax and Virgin Money pay the BEST ISA RATES of 2.5pc.
Flexible Isas
As of April 6, Isa providers have been able to offer customers “flexibility”.
The flexible feature allows customers to make withdrawals and pay the money back in without it impacting on the £15,240 allowance.
For example, if you held £15,000 in your Isa and withdrew it all, a flexible provider would allow you to pay £15,240 back in providing it was in the same tax-year. However, if the provider did not allow flexibility, you would only be allowed to deposit a further £240.
Lifetime Isa
From April 2017, the Lifetime Isa will be available.
Anyone between 18 and 40 will be able to save up to £4,000 a year which will be given a 25pc top up by the government.
The funds can either be used to buy a first home worth up to £450,000. Like the Help to Buy Isa, individuals can each hold a Lisa but both can apply for the government bonus.
Alternatively, savers can use the funds for retirement. If you withdraw the cash after your 60th birthday you won’t have to pay tax. If you need the money before then and you are not buying your first home, you will not be entitled to the government bonus and will have to pay a 5pc charge.
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