It’s the start of a new financial year, which means now’s the time to start thinking about where you want to stash your savings over the next 12 months. One option is to put your money into an individual savings account (ISA) – these are accounts that let you put away up to £20,000 each year without having to pay tax on the dividends.
There are four different types of ISA that we’re going to take a look at. If you want to split your allowance between several different accounts then that’s fine, but each account would need to be a different type of ISA (for instance, you may want to use both a lifetime ISA and a stocks and shares ISA).
This is the most basic type of ISA – a simple savings account that keeps your money safe and pays a small amount of interest. Cash savings are useful, since they do not put your funds at any risk and can be accessed quickly in case of an emergency.
Currently, though, the interest rates available from cash ISAs are extremely low. For many people with relatively small savings balances, it may be a better option to simply open a standard savings account that pays better returns. Since everyone in the UK also has a personal savings allowance of £1,000, most people don’t need to pay any tax on their cash savings anyway – making an ISA unnecessary. However, if you’re planning to save larger amounts and want the money to be easily accessible, this kind of ISA could be for you.
A lifetime ISA is brilliant for anybody who is saving for their first home, and can also be used to put away money for retirement. You can only save up to £4,000 each year (leaving the rest of your ISA allowance free for other types of accounts), however the government will pay in a 25% bonus on top of what you’ve put in. This means that those who save the maximum of £4k will actually have £5,000 saved after a year.
There’s one big caveat for these accounts: you have to pay a penalty if you try to withdraw the money for any other use. This means that it should only be used if you’re certain that your money you’re saving is only going to be spent on a deposit, or on later life.
Stocks and Shares ISA
These accounts let you invest your money in a relatively straightforward way. Investing is popular because it tends to pay higher returns that a cash account over a long-term period. Of course, it also means that your capital is at risk: the value of your investments can always go down as well as up. Stocks and shares ISAs shouldn’t be used for your emergency fund, however they’re a great place to store additional savings. If you can afford to leave your investment alone for several years then you’re likely to see better returns.
Innovative Finance ISA
Perhaps the least common type of ISA, innovative finance accounts are used for peer-to-peer lending. This means that you are effectively offering your money up as a loan for individual borrowers or businesses. They are only recommended for more experienced investors due to the higher level of risk. However if you do have a larger sum of money to play with and you’re looking to do something more interesting with your cash, these types of account have the potential to yield the highest returns.