Launched on 6 April 1999, the Individual Savings Account (ISA) has helped millions to save for their future. Introduced to replace the PEP (Personal Equity Plan) and TESSA (Tax-Exempt Special Savings Account) schemes, ISAs are accounts that meet the needs of individuals saving for a wide range of purposes. With the versatility and tax-efficient saving opportunities they offer, it’s no wonder they have proven to be so popular; 10.8 million adult ISAs were taken out in the 2017/18 tax year, along with around 907,000 Junior ISAs (JISA).
The growth of the ISA
At first, the ISA annual allowance was £7,000, but this has steadily increased over the years and now stands at £20,000 for the current tax year. Initially, there was a limited range of ISAs available, including the cash and stocks and shares ISAs. Now, a variety of ISAs are available to savers:
Junior ISA (JISA)
These were introduced in November 2011 to replace Child Trust Funds. Initially launched with an allowance of £3,600, this has increased to £4,368 for the 2019/20 tax year. They are available to children under the age of 18 and convert to regular ISAs after this age.
This is a savings account paying interest free of tax. You can only open one per tax year, but you can transfer to another cash ISA or stocks and shares ISA with a different provider.
Stocks and shares ISA
This ISA offers a way of investing in a diverse range of funds – up to a maximum of £20,000 per tax year currently – while ensuring you don’t pay any tax on any income or capital gains earned.
Innovative Finance ISA (IFISA)
These were introduced in April 2016 to allow investors to make peer-to-peer lending investments with any interest earned tax-free. Peer-to-peer lending is where investors with money to lend are matched up with borrowers. IFISAs are managed by peer-to peer lending platforms rather than financial institutions and the investments are not covered by FSCS protection, so your money is at risk. As a result, the FCA has warned anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing one.
This account, the most recent to be introduced, in April 2017, is especially for those between the ages of 18 and 40 who are saving up for a property purchase or retirement. The government pays a 25% bonus on contributions up to £4,000 each tax year until the age of 50. This could be a suitable option for those who missed the deadline for applying for a Help to Buy ISA.
You should be aware that you will have to pay a penalty if you withdraw the cash and don’t use it for a first home or your retirement, but no withdrawal charge would be payable if you died or became terminally ill.
If you want to make tax-efficient savings, an ISA could be an ideal choice. Of course, with so many options available, you may be unsure which is best suited to you, so talk to Lighthouse for advice on which ISA might work best for your personal circumstances.
The value of your investments can go down as well as up, so you could get back less than you invested.
Any capital growth and income you receive from your ISA are free from Capital Gains Tax and Income Tax, and you don’t have to pay tax on any withdrawals from your ISA.
Tax rules may change in the future and will depend on individual circumstances.