ISAs: what they are and how does each type differ?

ISAs: what they are and how does each type differ?

As we hurtle towards a deadline at the end of April for making decisions about where to put your ISA ‘allowance’, people are starting to review their options. It can seem daunting to the uninitiated, and so people approach their financial advisers. But having a broad overview of your options can make that decision – or the conversation – just a little easier.

We’ve put together this brief overview to help.

What is an ISA?

An ISA is an ‘Individual Savings Account’ – a tax free savings account.

There are five main types of ISA, which we’ll look at more closely below:

• cash ISAs;
• stocks and shares ISAs
• innovative finance ISAs
• lifetime ISAs
• junior ISAs (Many don’t consider these a separate type of ISA, but we’ve included them here as different rules apply)

ISA rules

Once your money is in an ISA it can’t be taxed, no matter how many years you have it in there. And since the government can’t tax your returns, there are, of course, going to be some rules:

• The amount you can invest in an ISA in a single tax year is your annual ISA allowance. It has a limit, which changes annually. Your annual allowance starts afresh each new tax year, starting April. (The annual allowance for 2019/2020 is/was £20,000.)
• You can usually only put money into one of each kind of ISA each tax year but there are exceptions for certain types of ISAs;
• You must be resident in the UK (although Crown servants – like diplomatic or overseas civil service, or their spouses/civil partners can still invest if living abroad).
• You can take your money out of an ISA at any time, without losing any tax benefits. However, the provider may charge, so check with them. There are also different rules for Lifetime ISAs.
• If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. However, you should check the terms of your ISA provider to see if there are any rules or charges for making withdrawals and whether or not they are ‘flexible’. (Here’s ours as an example: IFISA Terms and Conditions https://easymoney.com/ifisa-terms ) Again, there are different rules to withdrawals for Lifetime ISAs;
• Lifetime ISA’s excepted, you can transfer your ISA from one provider to another at any time. The amount you can move will depend on when you invested it with your provider;
• You cannot normally hold an ISA with, or on behalf of, someone else;
• There are further limitations within each type of ISA, such as age.

Note that if you open an ISA and then move abroad, you can’t put money into it after the tax year you moved - but you can keep it open and will receive the UK tax relief on it. You can also still transfer an ISA to another provider even if you are not resident in the UK. And you can start to pay into your ISA again if you return and become a UK resident.

ISAs are a highly personal decision. What’s right for you will depend upon your need for security and expected returns, and your faith in the provider. We’d obviously love you to invest with us at easyMoney, but like all providers, we are unable to offer any guarantees.

Listed below is just as summary of what each ISA is and the primary governing rules – you should always check the terms and conditions of your ISA for further details of the providers terms and conditions. If you use an IFA (Independent Financial Adviser) they should tell you about where your money is invested, what they charge, and, if appropriate, what their relationship/financial relationship is with the provider.

Cash ISAs

Cash ISAs are similar to an ordinary savings account: pay in cash and it earns interest, tax free. (Since the financial crisis, interest rates have remained low - the average yield on a Cash ISA is only 1 per cent, according to figures by Money&Co.)

Cash ISA’s include specific savings in bank and building society accounts, and some National Savings and Investments products. To hold one, you must be 16 or over.

Cash ISAs, which are offered by banks and building societies, are covered up to £85,000 per person, per firm, by the Financial Services Compensation Scheme should your provider fail.

Innovative Finance ISAs

Innovative finance ISAs - otherwise called IFISAs - include peer-to-peer loans (loans that you give to other people or businesses without using a bank) and ‘crowdfunding debentures’ (investing in a business by buying its debt).

You cannot transfer any existing crowdfunding debentures or peer-to-peer loans into an innovative finance ISA, and must be 18 or over to hold an innovative finance ISA.

Innovative Finance ISAs are not covered by the Financial Services Compensation Scheme (FSCS).

The easyMoney ISA is an IFISA, which conservatively invests your money in peer-to-peer loans against property. You can find out more about it at the end of this article.

Lifetime ISAs

A Lifetime ISA is one of a number of ways to save for later life. To start one, you must be 18 or over but under 40. The investment in your Lifetime ISA can be held in cash or stocks and shares, or have a combination of both.

You may invest up to £4,000 each year in a Lifetime ISA, until you’re 50. This limit (£4,000) counts towards your annual ISA limit (of £20,000 for the 2020 to 2021 tax year). The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

As soon as you turn 50, you will not be able to pay anything further into your Lifetime ISA - or earn the 25% bonus. However, your account will stay open and your savings will still earn interest or investment returns.

You can ONLY withdraw money from your ISA if you’re:

• buying your first home;
• aged 60 or over;
• terminally ill, with less than 12 months to live.

You can take your savings out of a Lifetime ISA when you’re 60 or over. You’ll forfeit 20% if you withdraw cash or assets for any other reason before then - known as making an ‘unauthorised withdrawal’. (Note that the charge returns to 25% on 6 April 2021.)

This recovers the government bonus you received on your original savings, and applies even if you transfer money from a Lifetime ISA to a Help to Buy ISA. (The Help to Buy ISA no longer operates – it closed to new accounts in 2019, but if you had opened one before 30 November 2019, you can continue saving until November 2029).

If you die, your Lifetime ISA ends on the date of your death and there will be no charge to withdraw the funds or assets from your account (but the government will, of course, still get its share through Inheritance tax).

Stocks and shares ISAs

With a Stocks and Shares (Investment) ISA, your provider is investing your money - as the name suggests - in things like stocks and shares, bonds, gilts or commercial properties. As they are based on the stock market, the amount of money in your ISA could go down as well as up according to stock market fluctuations.

You cannot transfer any non-ISA shares you already own into a Stocks and Shares ISA unless they’re from an employee share scheme, and must be over 18 or over to own a Stocks and Shares ISA.

As it’s classed as an investment, a Stocks & Shares ISA will only normally be covered up to £50,000 per person, per firm, by the Financial Services Compensation Scheme should your provider fail.

Junior ISAs

There are two types of Junior ISA (which are really just other kinds of ISAs with conditions to protect the child’s savings and different taxation to account for the child’s age):

• a cash Junior ISA - basically a cash ISA with no tax on interest on cash saved;
• a stocks and shares Junior ISA - cash is invested (as in a Stocks and Shares ISA) and, again, there is no tax on any capital growth or dividends you receive.

Junior ISAs are designed for children under 18. Parents or guardians with parental responsibility can open a Junior ISA and manage the account, but the money will belong to the child.

The child can take control of the account when they’re 16, but they cannot withdraw the money until they turn 18. Children aged between 16 and 18 can hold both a Junior and a standard Cash ISA.

About the easyMoney ISA

The easyMoney Innovative Finance ISA has been delivering investors 3.67-8% returns p.a., although obviously there are never guarantees with financial investments, particularly in light of COVID and Brexit, which cast some uncertainty over the markets – and there will doubtless be winners and losers.

Our investments are considered a form of ‘peer to peer’ lending (more on this later): we lend on property (land and buildings of any type) secured on a first charge basis, in the form of carefully reviewed bridging loans or development investment, to a maximum of 75% of the expected market value.

We consider property a relatively stable market to invest in (but we can’t repeat enough that no-one can promise anything). You can read about our ISA in more detail here: About our IFISA. https://easymoney.com/innovative-finance-isa-ifisa

There’s even a handy downloadable guide. As our name suggests, we like to make it easy!

Please note that whilst every effort has been made to ensure the accuracy of the information given here, it is written in a spirit of helpfulness and cannot constitute legal or financial advice. Things change constantly in the financial services world, so you shouldn’t rely on this information alone to make an investment. You should reassure yourself that you fully understand the terms and conditions attached to any investment and the risks involved.

easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.

easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.