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Various types of ISA exist today and different providers offer various rates. Whilst it is great to have choice as a consumer, this can make it difficult to find an ISA which suits your needs. In this guide, our team at Elmfield Financial Planning in Padiham, Burnley offer a summary of the main ISA types available in 2021-22. We also suggest ways to find a good deal and how to use ISAs effectively in your financial plan. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Similar to a regular savings account, a Cash ISA lets you store cash and earn interest on the savings. The main advantage, however, is that any interest generated in the account is tax-free (even after your Personal Savings Allowance is used up). Just like a regular savings account, you can opt for easy-access or a fixed-rate deal. The former offers an interest rate up to 0.6% AER in 2021, whilst the latter might offer up to 1.02% for a 2-year fixed-rate ISA. A cash ISA can be a helpful place to store emergency savings. You can put up to £20,000 into your ISAs each tax year, but be mindful that using this allowance on cash will prevent you from taking advantage of investment tax reliefs (discussed next).
Stocks & Shares ISAs
This ISA lets you invest in equities (company shares), bonds and other assets (e.g. gold, via ETFs) and generate both capital gains and dividends without these being taxed. If you want to build a sizable portfolio outside of your pension, therefore, then using a Stocks & Shares ISA can be a good place to put it. This gives you more flexibility regarding your other allowances – offering the chance to save more tax in the future. For instance, your £12,300 capital gains tax (CGT) allowance could be used to cushion the tax on proceeds from a Buy To Let property sale, whilst your equities build nicely in your ISA and do not attract tax when sold for a profit.
These ISAs are dedicated to younger people, allowing you (the parent/guardian) to save or invest on a child’s behalf until they reach age 18 – when he/she takes control of the ISA. Here, you can commit up to £9,000 per year and the rates tend to be better than adult Cash ISAs, with interest rates 2.5% or higher. If you want the chance of faster wealth growth, however, then you could opt for a Junior Stocks & Shares ISA instead. Similar to the adult version, this ISA lets you invest in equities, bonds and other assets on your child’s behalf. Bear in mind that investments often go up and down over time, however, and so you need to choose an appropriate strategy in light of risk tolerance, the investment horizon and financial goals.
If you are looking to save tax-efficiently for a property or for retirement, then a Lifetime ISA (also called a LISA) may be a good option. Each tax year, you can commit up to £4,000 and receive 25% more from the government. You must make your first LISA contribution before age 40 and must use the money on a deposit for a first home (valued under £450,000), or withdraw after the age of 60. You can get the government “top up” on your contributions between age 18-50. This structure can make the LISA a great option for younger people looking to get on the housing ladder. For those looking to build retirement savings, however, you will need to weigh the pros and cons against those of saving into a pension.
Innovative Finance ISAs
Are you prepared to take on more investment risk for the possibility of higher returns? Perhaps you also have an interest in startups and other fast-growing companies which are offering new, disruptive solutions to pressing customer problems. If so, then an Innovative ISA allows you to lend money to such businesses through peer-to-peer (P2P) lending, earning tax-free interest in the process. It is also possible to lend to individuals and property developers via this structure.
Bear in mind, however, that returns are not guaranteed and platforms that offer such ISAs are typically not covered by the Financial Services Compensation Scheme. If the platform goes bust then you could lose all of your investments. Some hold funds in reserve to pay investors in the event, but not all investors are likely to be compensated fully. You might also have to wait for a while before you can withdraw all of your money (since this will be tied up in loans). Consider talking with a financial adviser before committing significant funds to this type of ISA, to be sure that you are mitigating your risk and investing in line with good practice.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938