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Confused about ISA's? How To Pick The Right One For You

Updated: Nov 11, 2021


Not all ISA's are created equal.


It can be a bit confusing deciding on which one is right for you, as there are many different types out there that are suitable depending on your age and financial situation.


In this article I will give you a complete overview of the different ISA products out there and who they are best suited for!


Please note this is not investment advice, this article is purely for educational purposes. If you're unsure about whether any of these ISA's are right for you, please contact a financial advisor.


Cash ISA's


A cash ISA is a savings account that pays interest free of income tax, unlike your traditional savings account at your bank.

To open a Cash ISA (CISA), you must be at least 16 years old and live in the UK.


The difference between a savings account and a CISA is that in a savings account you can access your money whenever you want. However in a CISA your money is "locked away" for a certain period of time, with a fixed rate of interest.


In this type of CISA there is usually a withdrawal fee if you withdraw before the end of the fixed term. However there are some CISA products out there that provide easy access with no withdrawal charge, but the interest rate is usually lower.


How Many You Can Open, And Contribution Thresholds


You can only open one ISA (Independent Savings Account) per year per type. So you can't open 2 CISA's in the same year, but you can open one CISA and one Stocks & Shares ISA.


It's also important to be aware the threshold for all of your ISA's combined is £20,000. After that limit is reached, you are liable to be taxed on your contributions and interest.


Can You Switch Your Cash ISA To A Different Type?


If you open a Cash ISA it is possible to transfer to a different type, but you'll only be able to transfer the full amount from your current years contributions first, then partially transfer previous years contributions.


So if your balance was £15,000, and you had contributed £10,000 this year, you'd have to transfer that whole balance first and then transfer the rest of your previous years contributions.


This applies to S&S ISA's as well that we'll talk about shortly.


Cash ISA's Fund Protection


There is also a limit on your moneys protection. Your money is protected up to £85,000 per person per financial institution by the FSCS. So if the bank or building society your using goes bust, you're only guaranteed to get £85,000 back and potentially lose everything else (although the chances of this happening are very small).


Verdict on Cash ISA's


Cash ISA's are not the most attractive option right now. The best interest rate you can get on a CISA right now is 0.6% for an easy access product, and 1.51% for a fixed term product. Both of these rates are below inflation so it is pretty pointless to have a CISA with the current market conditions. When CISA's are paying rates above inflation they are the lowest risk option out of all of the ISA products. But for now, there are much better options available.



Stocks & Shares ISA's


Stocks & Shares ISA's are a bit different to Cash ISA's in a few ways. The interest rate you get on the S&S ISA is dependent on the performance of the stock market, so your money could go down as well as up.


This makes them a riskier option on paper than Cash ISA's, but the level of returns you can get on your contributions are so much better.


Much like Cash ISA's, S&S ISA's are tax free up to £20,000 per year, and for me personally they are the best option for long term growth.


What You Can Buy In A S&S ISA


In a Stocks & Shares ISA you can buy various different financial instruments such as shares, REITs, ETF's and bonds. So there's a lot of options available depending on what suits you.


If you're a low risk investor, ETF's and bonds would be the best place to start. If you're happy to take on a bit more risk, then you can invest in individual shares or REIT's (real estate investment funds)


The key thing with using S&S ISA's (or any ISA for that matter) is to reduce fees and costs. Some brokerages charge you a fee to use their platform, and some charge you every time you trade (called a commission).


However there are a few providers that do not charge you a penny. Trading212's ISA product is free to use and offers 0% commission on any trades you make. The only fees they deduct is foreign exchange charges when you buy foreign shares, the fee is a miniscule 0.15%. I use Trading212 and I'd highly recommend using them to keep your fees as low as possible. It can have a huge impact on your returns in the long term.


S&S ISA Fund Protection


As with Cash ISA's, your cash is protected by the FSCS up to £85,000. However your investments (Stocks, bonds, ETFs) are only protected up to £50,000.


Verdict On S&S ISA's


If you're interested in playing the long game, generating huge returns over a number of years, and comfortable with an element of risk, then S&S ISA's are for you. I personally invest in a S&S ISA instead of a Cash ISA because I am happy with the risk and attracted by the high level of returns.


In my opinion Cash ISA's are more risky at the moment, because you are guaranteed to lose purchasing power due to their interest rates being below inflation. You'll make a bit from interest but its pointless because you will be getting less "bang for your buck" overall. However if market conditions were to change, I'd consider opening one.


But for me right now now, S&S ISA's are the way to go.


Junior ISA's


Junior ISA's are for anyone under the age of 18 and can be set up by the child's parent or legal guardian, but it must be in the child's name.


The child cannot withdraw the funds from a JISA until they are 18 years old, but are able to manage their account from the age of 16.


You can contribute up to £9,000 a year into a Junior ISA, and they can either be Cash ISA's or Stocks & Shares ISA's.


Once the child turns 18, the JISA will automatically become a standard Cash or Stocks & Shares ISA, and the child can then contribute their own money into it, plus the threshold for contributions will increase to the standard £20,000.


You can open a JISA for each of your children, but you can't group them all into one as each JISA has to be in an individuals name.


This type of ISA is also tax free.


Verdict On Junior ISA's


This type of ISA is perfect for people who want to invest in their child's future right from the get go. I will personally be opening one of these as soon as I become a father!


Lifetime ISA's (formerly Help To Buy)


A Lifetime ISA is designed for people saving for a home or people wanting to save towards retirement.


You can only contribute £4,000 per year into a Lifetime ISA, however there is a government bonus available which the other types do not provide.


The government tops up your contributions with a 25% bonus. So if you pay in £4,000 this year, the government will add £1,000 on top of that.


You can only open a LISA between the ages of 18 and 39. And you can only pay into them up until you are 50.


However you cannot take this money out without incurring a 25% withdrawal charge, unless the below applies...


The LISA has been open for at least a year

You are 60 years old

You are taking the money out to buy a mortgage on a home worth less than £450,000

You are terminally ill with less than 12 months to live


It's also worth noting that incurring the withdrawal charge will likely mean that you get back less than you paid in. A 25% charge on £5,000 is £1,250. So you'd lose the £1,000 bonus and be charged £250 (assuming you had contributed the £4,000 I mentioned earlier).


Lifetime ISA Fund Protection


Your cash is protected up to £85,000 by the FSCS, while investments (Stocks, bonds etc.) are protected up to £50,000.


Verdict On Lifetime ISA's


These are a great option for first time buyers, especially since you are getting a rather generous bonus. I think a Lifetime ISA as a retirement fund is a poorer choice compared to an S&S ISA because you can contribute 4x more into a S&S ISA.


Plus there's a limited timeframe to invest in a LISA, whereas an S&S ISA you can contribute to it for as long as you want.



Innovative Finance ISA's


Innovative Finance ISA's are without doubt the riskiest option out of all of the ISA's, and I'd like to stress I DO NOT recommend opening one of these (it's just here for educational purposes, as is the rest of these ISA types)


IFISA's are ISA's that offer peer-to-peer lending instead of cash or stocks/shares.


This basically means you are loaning your money to other individuals, businesses or property developers.


Lending in this way cuts out the middle man (the bank) so the interest rates you get in an IFISA tend to be higher, however there is a major caveat...


IFISA's Offer Minimal Protection For Defaults


IFISA's are so risky because if the borrower you loaned money to goes bankrupt or their company collapses, you will probably lose all of your money.


IFISA's are not protected by the FSCS (Financial Services Compensation Scheme), so there's little chance of getting your money back if the borrower defaults.


In fact they are so risky that in 2019, they changed the rules so that IFISA's would not be directly promoted to the general public. This was to protect less experienced investors from losing huge sums of cash.


As with Cash or S&S ISA's, the allowance for IFISA's is £20,000 and you can only open one per year.


Verdict On IFISA's


I wouldn't touch these with a bargepole if you're not an expert investor.


Final Thoughts


Phew! That was a lot to wrap your head around!


As you know by now, there are a lot of different types of ISA out there. Some people only use one type, others have several. For me personally, the only three I'm interested in are S&S ISA's, Lifetime and Junior ISA's.


S&S for the long term returns, Lifetime for the extra bonus that I could use for a mortgage deposit, and Junior ISA's to help give my child a head start with their finances.


Your own personal preference may be different to mine, but I'd recommend doing your own research before jumping in!


If you'd like to chat about ISA's, you can DM me on Twitter or send an email to contact@metalheadinvestor.com and I will be happy to answer your questions!


If you found this article helpful, please consider buying me a coffee on Ko-Fi. All coffees will be reinvested into the website and not spilt down my shirt in an important business meeting.

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