A Simple Guide to UK ISA’s

ISA’s are the best place to keep your savings and a great starting point for investing in the UK. ISA stands for Individual Savings Account. They act like tax bubbles for your money, meaning that any interest gained is completely tax free.

Every UK resident over the age of 18 can save up to £20,000 each tax year into one or more types of ISA’s. Tax years run from the 6th April to the following 5th April. The only exception to this rule is Lifetime ISA’s, where you can only contribute £4,000 out of your allowance each tax year.

Example: You save £10,000 in a year, £4,000 into a Lifetime ISA and £6,000 into a Stocks & Shares ISA. In this case you still have another £10,000 available in your yearly allowance.

It is possible to have more than one type of ISA open but you cannot pay into two of the same type in the same tax year.

Example: If you open a Lifetime ISA in June and then decide you actually want a Lifetime Stocks & Shares ISA you will have to wait until the following April to open this. However, you could open an ordinary Stocks & Shares ISA in the same tax year because these are different types.

[Disclosure: Please keep in mind that some of the links in this post are affiliate links and if you go through them to make a purchase I will earn a commission. I link to these companies and their products because of their quality and not because of the commission I receive from your purchases. The decision is yours.]

What types are there?

There are four key types of ISA’s:

Cash

Stock & Shares

Lifetime

Junior

Each of these suit different situations and goals, they are not a one size fits all. Below I have broken down the pros and cons of each type of ISA.

Cash ISA

A Cash ISA is the most similar to a normal savings account, where the money sits there in cash with a predetermined interest rate.

Pros:

-> Your money is easily accessible

-> No capital is at risk

Cons:

-> Interest rates are very very low at the moment so your money will be losing value due to inflation

RELATED READING: How To Save and Still Have Fun

Stocks & Shares ISA

This ISA is where your money gets invested for you by the provider. When it comes to Stocks & Shares ISA’s you have two choices; do it yourself and do it for me.

Do it yourself – where you pick your own funds and shares to invest in. In this case you have more control in where your money is being invested. This type is the best for people who already know what they are doing.

Do it for me – your money is invested into a ready-made portfolio. This one requires less knowledge, responsibility and time. The portfolio is based on your risk level, what you can afford and any goals.

Pros:

-> The return is more likely to beat inflation and be higher than any interest rate out there currently

Cons:

-> Your capital is at risk. Over the past 100 years the stock market has averaged a 10% return each year but this is not guaranteed

Lifetime ISA

This is a relatively new scheme that has come in to replace the old Help to Buy ISA. You can only contribute £4000 into this type of ISA each tax year but any contribution up to this limit is matched 25% by the government. The major downside to this type of ISA is the limitation in withdrawing the money. You may only withdraw to buy your first home (up to the value of £450k) or when you reach the age of 60. It is possible to withdraw at any time but you will face a penalty.

This type of Lifetime ISA is similar to a Cash ISA in that they both have a predetermined interest rate.

Pro:

-> 25% government bonus – opportunity to gain £33k in bonuses

-> Less incentivised to withdraw and spend the money

Cons:

-> Only really worth it if your saving for a house or retirement

Lifetime Stocks & Shares ISA

A Lifetime Stocks & Shares ISA is a combination of both a Lifetime ISA and a Stocks & Shares ISA. You still get the 25% bonus, the £4k limit and the restrictions on spending but the money is also invested.

Pros:

-> 25% government bonus

-> The return on investment will likely beat inflation

Cons:

-> Capital is at risk

-> Need at least 5 years to make investing worth it

Junior ISA

There are two different versions of a Junior ISA, cash and stocks & shares. A parent or guardian can open up a Junior ISA on behalf of their child but the money belongs to the child. You can save up to £9,000 into one or more types of Junior ISA’s on behalf of your child each tax year.

The child can control the account from the age of 16 but they are not allowed to access the money until they turn 18.

Pros:

-> Chance to save for your child’s future

-> Can’t access till the child is 18 – less chance of spending savings

Cons:

-> Only children born after 2nd January 2011 are eligible to apply for a Junior ISA

-> Can only access the money when the child turns 18 – could be a problem if you are saving more than you can afford to

How to Open an ISA

ISA’s are offered by a variety of providers including banks, building societies and credit unions. Simply contact or go onto the providers website to see exactly how to open an ISA with them.

There are a few providers that have apps which make keeping track of your balance easy, my favourites are Moneybox and Nutmeg.

Why do I recommend Moneybox?

With Moneybox, you only need £1 to open an ISA, so they make ISA’s completely accessible to everyone. The application process is so easy, you can have you account open within minutes. A great thing about using Moneybox is their low fees. As an example, for an investment ISA, you pay £1 a month as a subscription fee (the first 3 months are free) and then 0.45% platform fee which is also charged monthly. These fees come out automatically and are not shown in your total value so they kinda become forgettable.

One of the main reasons why I would recommend Moneybox is for their app. It is very accessible, with some amazing functions. Such as Moneybox rewards, where you can earn cashback when shopping at a variety of retailers. Further, they also offer a round-up function, where you connect your card and every purchase made gets rounded up to the nearest pound. The difference is then automatically contributed to your ISA. This is a great way to build your savings without thinking about it.

All of these are great but my favourite function on the Moneybox app is the calculators they offer. Where you can see the potential value of your contributions years in the future and adjust it to fit your specific numbers.

Why do I recommend Nutmeg?

My favourite thing about Nutmeg is that they not only have a useful, easy to use app but you can also access your account online. Sometimes I like having the flexibility to be able to do both. Similar to Moneybox, the fees that come with a Nutmeg account are also relatively low and they vary on rate for both type of product and amount in the account.

The Nutmeg app has a valuable news function, where you can easily and concisely access news pertinent to investing.

The only real difference between Nutmeg and Moneybox is the starting value you need. Where with Moneybox you can start with £1, for Nutmeg it ranges from £100-£500 depending on the product.

If go through my link, open a Nutmeg account and invest £500, you will get 6 months no fees.

What happens if you move aboard?

You are not able to add any money into your ISA’s if you move aboard and are no longer a UK national. However, you may keep the money in the account and benefit from the UK tax relief.

Once you move back and become a UK national again, you can begin contributing into your ISA again.

Conclusion

An ISA is a great place to keep your savings, especially for the tax benefits. If you are saving for a house or retirement, saving in a Lifetime ISA is smart simply because of the free money. Furthermore, if you are wanting to start investing, a Stocks & Shares ISA is a great place to start.

Do you have an ISA? If not where do you keep your savings?