A beginner’s guide to the ISA

 

Don’t know your ISAS from your ESTAS? Look no further! I’ve put together a simple guide on all the ISA’s available and how they may be beneficial for you.

Cash ISA

A pretty standard account for savings. £15,240 is the maximum you can save per annum, if you earn any interest, it’s tax free!

Pros: A simple and safe investment where you can build up a considerable sum of money.

Cons: The interest you earn can be meagre: as little as 0.05 per cent. The tax-free element is less valuable after the introduction of the personal savings allowance, which means that basic-rate taxpayers can now earn up to £1,000 interest a year tax-free (£500 for higher-rate taxpayers), though savers with large sums could still benefit from the tax shelter of an Isa.

Help to buy ISA

This is a cash ISA aimed at first-time buyers to help them on to the housing ladder. You can save up to £1,200 in the first month of opening an account, and a maximum monthly limit of £200 thereafter. When you use the money to buy your first home (at a value of up to £250,000-£450,000 in London), you receive a 25 per cent bonus, up to a maximum of £3,000.

Pros: The government adds 25 per cent to your savings. Why would you refuse?

Cons: The bonus is only paid after completion of a house purchase, not at exchange of contracts, and if you fail to buy a house, you don’t get the bonus. It also prevents you from subscribing to a cash ISA in the same year as a Help to Buy ISA, unless you go through certain specialist lenders.

Stocks and shares ISAs

Your money is invested in shares, bonds or commercial property. Most investors use collective funds to spread their money across a portfolio of holdings, but you can buy individual shares.

Pros: There is no tax on any capital gains from buying and selling investments, nor on any bond interest, or dividend income received. This is valuable for those whose investment income or capital gains would take them above the annual capital gains tax (CGT) allowance of £11,100, or the new dividend allowance of £5,000.

Cons: Shares, bonds and property are risk investments where you could lose substantial sums of money. If you have investments that generate only modest annual income or capital gains, you could find that the CGT and dividend allowances are more than sufficient for you so that the tax breaks of an ISA are superfluous.

Innovative Finance ISA

This enables you to engage in peer-to-peer lending, with the bonus that any interest you earn will be tax-free.

Pros: You should earn higher interest than on a regular savings account.

Cons: The people or organisations that you lend to could default on their repayments, leaving you out of pocket.

The peer-to-peer business model is relatively untested on a large scale and although the sector is regulated it falls outside the safety net of the Financial Services Compensation Scheme. There are not many peer-to-peer Isas, so choice is limited.

Junior ISA

You can save up to £4,080 a year into a Junior Isa for each of your children, either in a cash or a stocks and shares Isa. The account is held in the child’s name, but opened and managed by you. The money transfers to your children when they turn 18.

Pros: It’s a good way of building up a tax-free lump sum for your children.

Cons: You lose control of the money when your child reaches 18.

Best buys?

Cash ISA: Virgin Money’s One-Year Fixed-Rate cash E-Isa at 1.05 per cent; Paragon Bank’s Five-Year Fixed-Rate cash Isa at 1.6 per cent.

Help to Buy ISA: Barclays Bank and Buckinghamshire Building Society, both at 2.25 per cent.

Junior cash ISA: Coventry Building Society’s Junior cash Isa at 3.25 per cent; Nationwide Building Society’s Smart Junior Isa at 3 per cent.

Junior stocks and shares ISA: For cautious investors, Witan Investment trust. For adventurous investors, JPMorgan Emerging Markets fund.

Adult stocks and shares ISA: For cautious investors, Investec Cautious Managed fund. For the more adventurous, Invesco Perpetual Asian fund.

As you can see, there are many different options! Of course the most important thing is what’s most relevant to you as an individual. If you aren’t sure about what this one may be, please get in touch! Happy saving!

– Bronny

bronwin@askbronny.com