ISA types explained
What is a cash ISA?
Cash ISAs are basically ordinary savings accounts but you won’t pay tax on any interest you earn.
As with a mainstream savings account, you must be a UK resident and aged over 16. With a cash ISA you’ll never be taxed on your interest, but you can’t deposit more than £20,000 in any one tax year.
For basic rate taxpayers, this tax relief on ISA interest isn’t overly attractive. That’s because, thanks to the personal savings allowance, introduced in 2016, basic rate taxpayers can earn up to £1,000 of interest in any kind of account and not pay tax. For higher rate taxpayers this allowance is £500.
It might seem that cash ISAs have been made redundant, but any interest earned in an ISA doesn’t count towards your personal savings allowance, which could be useful for those with substantial savings.
Also, ISAs are a well-established part of the savings landscape, but there is no guarantee underpinning the existence of the personal savings allowance.
If you’re looking to open this type of savings account, the easiest way to search for the best deals is to compare cash ISAs with MoneySuperMarket.
If you already have an ISA balance and are looking for a better deal, you will need an account that accepts transfers-in from existing ISAs from previous years.
What does it mean when ISAs have a fixed-rate?
A fixed-rate cash ISA is a savings account which has a specific interest rate for a certain period of time, hence the name. They are good for taking advantage of the ISA allowance, if you have enough money to effectively lock away those savings for one to five years.
The interest rate will usually be higher for a fixed-rate ISA because a bank presume that your money will be in the coffers for the whole term, meaning it can invest your money for longer and potentially make more profit for the institution.
One of the downsides to a fixed-rate ISA is that there may a large penalty for taking your money out before the end of the term. Also, you might not be able to transfer money from a cash ISA into a fixed-rate ISA, but you would need to check with your provider.
What is an Instant access cash ISA?
An instant access cash ISA is just another type of cash ISA that does exactly the same as a normal ISA but you can access your money quickly and simply, instead of having to request a withdrawal from the bank. They are particularly handy if you want easy access to funds.
With such easy access to your money, you will probably lose out on the interest rate, which tends to be higher on fixed-term ISAs. Find out about interest rates when you compare instant access cash ISAs.
What is a junior ISA?
If you’re worried about how you are going to pay for your child’s first car, or an expensive university education in the future, then a junior ISA could be a good idea for you.
The great thing about a junior ISA is that your child cannot touch the money until he or she is 18 years old, after which the account becomes a normal ISA.
It’s easy to check for interest rates and explore junior ISAs on MoneySuperMarket’s comparison tool.
Stocks and Shares ISAs
You can invest your full ISA allowance of £20,000 in a stocks and shares ISA if you want. Stocks and shares ISAs come in two forms – ISAs from direct providers and self-selected fund ISAs.
Stocks & Shares ISA Direct Providers
Unlike cash ISAs, stocks and shares ISAs put your money in the stock market, meaning the amount could go up or down with the share price. As direct ISA products usually track performance of stock markets, like the FTSE 100, they are normally investments managed by a provider.
The idea behind a stocks and shares ISA is that you don’t need to be actively monitoring things every single day. You must trust that the bank or provider will be investing wisely for your money, but as with any shares, prices increase and decrease across the year so you are not guaranteed a return.
Plus, you need to remember that the capital paid in is not protected like a cash ISA, so there is a risk that you might not get back even as much as you have paid in.
Take a look through our list of S&S ISA Direct Providers to compare deals on the market.
Self-selected fund ISAs
They are great if you want to be in control of exactly which investments you make, with whom and when.
These plans tend to be more suited to experienced investors, as they can be higher risk, and your capital is not protected. This means you may not get back as much as you have paid in.
Innovative Finance ISAs
A relative newcomer to the ISA market, the Innovative Finance ISA launched in 2016 and is a way of investing money without saving cash or utilising the stock market.
Instead, an IFISA uses peer-to-peer lending and your money is borrowed by both businesses and individuals looking for a better rate. It basically cuts out a middleman, for example a bank, and because of this their use is growing fast.
Their rising popularity is perhaps due to the high rates of interest. The rate that you get is worked out by the borrower’s credit history – so if they have a good history then you will get a lower rate back, say 3-4% interest for example. But if the individual borrowing has an average credit rating, then you will get a higher interest back, say 5-6% – because of the increased risk you face.
There is a certain level of risk involved with an IFISA: if the business fails or the person you lend to defaults on the debt, then you may be left with less money back. However, your money will be spread between different debtors to lessen this risk.
If you invest in an IFISA, you need to know that your money is not protected by the Financial Services Compensation Scheme like it would be in other ISAs.
The peer-to-peer lender you use may have its own scheme, so make sure you check this out. And, if the peer to peer lending site holds your money in a client account opened with an FAS-authorised bank or building society, the FCSC would cover the investor up to the maximum claim limit.
Savings outside your allowance
If you have already filled your ISA allowance, then there could be much better places than an easy access savings account to put the remainder of your cash. Check out all your options here at our dedicated savings hub.
Remember too that all basic rate taxpayers can now earn £1,000 of savings interest a year without having to pay any tax on it thanks to the new Personal Savings Allowance (PSA). You’ll be a basic rate taxpayer in the 2017-18 tax year if your income is anything less than £45,000.
If you’re a higher rate taxpayer, paying tax at the 40% rate on an income between £45,001 and £150,000, you’re entitled to a lower PSA of £500 a year.
If you’re an additional taxpayer earning £150,001 or more, you won’t get an allowance at all.