March 25, 2021

💰 Interesting ISAs

Hey there 👋

Usually, around this time of year, you’ll start seeing more reminders, adverts, emails and more all saying the same or similar thing - “Remember to use your ISA limit before the end of the tax year”, and honestly, I don’t think it’s a big issue for the majority of people with ISAs.

ISAs can be confusing so here’s my personal take on ISA’s (Individual Savings Accounts) and which ones I think are worth looking into for yourself (based on your goals).

TL;DR - Spend some time looking into different types of ISAs and how they can help you reach your financial goals

Before going any further if you’re not familiar with ISAs here’s a great guide to understanding them better ➡️ The big guide to ISAs

Why ISAs are great 🙌

I think ISA’s are one of the best savings/investment accounts on the planet. From what I’ve found, no other savings/investment account is as generous as a UK ISA.

In the US, IRA and Roth IRA and the closest thing to an ISA. Any money that goes into either one of these accounts (you can only have one or the other) can’t be accessed until after the age of 59 and a half. With a UK ISA, you have the freedom to withdraw your money at any time you like. With an IRA you also have to pay income tax on any withdrawals you make as well as some penalties if you make a withdrawal before the age of 59 and a half and this is really where the UK ISA shines in comparison.

With a UK ISA, you can make a withdrawal at any time (for the cash ISA and stocks and shares ISA) within a penalty - Perfect for if you’re planning on using the money for a large purchase (e.g. a home) or if you’re looking to retire before the state age of retirement. Other countries offer similar accounts to what the US offers and from what I could find online which only highlights the uniqueness of UK ISAs.

Something to bear in mind is the limit on how much you can invest into ISAs each tax year and currently, that’s £20,000. This is why I think ‘remembering to use your ISA limit’ isn’t beneficial to most people unless you can put away the full £20,000 each tax year (£1667 each month) into your ISA. If you are in a position where you’re able to put away £20,000 then it might be worth considering using up your allowance as it’s not possible to rollover any unused allowance from a previous tax year into the current or future tax years.

This limit can be split across several different types of ISA’s and it’s important to remember that you can only contribute money to one type of ISA in each tax year (e.g. you can contribute £5,000 into a cash ISA and £15,000 into a stocks and shares ISA in one tax year).

So how many ISAs are there and do you need all of them?

Types of ISAs (and my thoughts around them) ✨

There are five ISA types currently - cash ISAs, stocks and shares ISAs, the lifetime ISAs, innovative finance ISAs and Junior ISAs.The three most common ones for people over the age of 18 are the cash ISA, the stocks and shares ISA and the lifetime ISA, so let’s cover those three first.

Bear in mind, the following comments on each type are just my thoughts and opinions of each of these ISAs and this isn’t financial advice.

Cash ISAs 💷

Cash ISA’s are the simplest and most risk-free type of ISA - You can think of it like a normal savings account. The difference is that with a saving account, you’ll have to pay tax on any interest you earn that is over your personal saving allowance (£1,000 in interest for basic rate taxpayers, £500 for higher-rate taxpayers). With a cash ISA, you pay no tax on any interest regardless of your personal saving allowance. In my personal opinion, this isn’t as great as it sounds. Let me explain why.

At the time of writing this newsletter issue, the highest interest rate for a fixed term ISA was around 1% and can only be obtained if you lock up your money in this ISA for several years. The rates for flexible or easy access cash ISAs are a lot lower and range around 0.4% to 0.5%. If we consider these rates then you would need to have saved between £100,000 to £250,000 to earn enough interest to go over your personal saving allowance (assuming you are a basic rate taxpayer) with these ISAs and reaching these amounts will take years.

In addition to this, you’ll also need to consider the price of inflation - Any interest rate lower than the rate of inflation means that in the long term, your money is losing value rather than gaining any. You can find the current rate of inflation on the Office for National Statistics website and as of January 2021, it stands at 0.9%. A majority of the time, you’ll find that almost all (especially for instant/easy access cash ISAs) that the rates offered by cash ISA providers are below this.

In my opinion, this makes the cash ISA a terrible way of growing your money in the long term and it makes more sense to use a normal saving account for short term savings or an emergency fund instead.

Lifetime ISAs 🏡

Lifetime ISA’s are slightly different to other ISAs - The maximum amount of money you can put in a lifetime ISA is capped at £4,000 per tax year but the benefit is that for every £4 you put into the account, you get a £1 bonus from the government up to a maximum of £1,000 per tax year. This ISA was introduced in 2017 to replace the Help to Buy ISA and can be opened by anyone between the ages of 18 to 39. It has two purposes - to help savers save enough to buy their first home or it can be withdrawn as cash for your retirement (at retirement age that is).

If you open a Lifetime ISA at the age of 18 and made the maximum contribution until you were 50 then you would receive a maximum bonus of £33,000. A lot of home buyer will likely want to purchase a home before the age of 50, so the bonus received will depend on how much is saved in this ISA as well as how many years you decide to save for.

This is a great ISA if you are planning on buying a home soon (or for retirement in the long term) and it comes in two flavours - cash lifetime ISAs and stocks and shares lifetime ISAs. Additionally, you can contribute to this ISA and another cash or lifetime ISA regardless of the type of lifetime ISA you pick. Just know that with stocks and shares lifetime ISAs there are usually some additional fees such as platform charges and charges per trade (if you decided to pick your own stocks and shares for your lifetime ISA).

If you’re planning on buying a home in the short term and you plan on saving more than £4,000 a year, you could use a lifetime ISA in combination with another type of ISA to save up more tax-free (but as mentioned, I personally wouldn’t choose a cash ISA).

If you are looking to buy a home in the more long term (e.g. five-plus years), then you could save using your lifetime ISA (either cash or stocks or shares) with a stocks and shares ISA to grow your money over time. Just be aware that stocks and shares ISAs come with the risk of the value of your investments going down as well as up so it’s generally advised not to use them if you are not comfortable taking risks or if you need access to the money in the short term. This brings me to the next type of ISA…

Stocks and Shares ISAs 📈

As the name implies, you’ll be able to use the money you put into a stocks and shares ISA to buy….stocks and shares. There are two variations of this ISA - the automated option (or “do it for me”) or the “do it yourself” option. The automated option is great if you don’t want to spend a lot of time research funds and stocks that you want to invest in. It’s all taken care of for you, but it comes at a cost…literally. From what I’ve seen, the fees on accounts that take care of investing your money for you generally are a bit higher than do it yourself options. That however doesn’t make “do it yourself” options better - They can have their own fees as well depending on who provides them. Some platforms have low fees (e.g. Freetrade and Trading212) and other platforms charge per trade you make (on average around £9.99 per trade) so that’s something else you’ll also need to take into consideration.

This is my favourite type of ISA because it’s possible to beat the rate of inflation while also growing your savings further. Regardless of which type of stocks and shares ISA you get, you’ll want to avoid high fees as much as possible. Fees like this will eat into any gains you make and in the long term it can stack up quite a bit.

This ISA is better suited for long term savings/investing due to the risk that comes with it as stocks and shares can go up or down in value in a short period of time. I’ve gone with a “do it yourself” stocks and shares ISA myself and plan on investing in low-cost ETFs and a small handful of growth stocks.

And before someone asks, no you cannot buy cryptocurrencies within an ISA.

Innovative Finance ISAs 💥

I’ll be honest…this is the ISA I know the least about. This ISA is mainly offered by Peer to Peer (P2P) lender, and what I can tell you is that if you use an innovative finance ISA, your money will be used for peer to peer loans, making you a private lender rather than an investor like you would be with a stocks and shares ISA. The risks are also quite different; borrowers can default on their loans and your money isn’t even protected by the Financial Services Compensation Scheme (FSCS) like it is with the other types of ISAs.

Personally, no FSCS protection makes this a major no for me and there’s not much else I have to say about this ISA 😬

Junior ISAs 👶

If you’re over the age of 18 then unfortunately you won’t be able to open a Junior ISA. However, if you are a parent and wanted to put some money aside for your child/children for later on in life, then a Junior ISA could be great. Compound interest will work in their favour and depending on how soon you open an account for them, they can stand to benefit from up to 18 years of compounding interest.

Junior ISAs come in two flavours - cash ISAs and stocks and shares ISAs. Generally speaking, the interest rates on a cash Junior ISA are higher than what you can find with a normal savings account or a cash ISA. The stocks and shares ISAs variant can also be great as you’ll have up to 18 years to allow that money to compound over time and investing can outperform cash when it comes to long periods of time.

What are the downsides then? Well, the first is you can’t withdraw any money put into a junior ISA, only your child can and they can only do that once they turn 18. Additionally, the amount of money you can put into a junior ISA is capped at £9,000 per tax year at the moment.

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Anyway, that’s all my thoughts around these types of ISAs summarised as best as I can. I could probably still go on quite a bit about all this but I hope this gives you a general idea of why ISAs could be beneficial for you if you don’t already have one. If you wanted to go further down the rabbit hole of the world of ISA’s then there are many resources you can check out but my first stop and recommendation would be to check out the Money Saving Expert website.

See ya next time! 🦀