ISAs: A simple and mercifully brief guide to individual savings accounts

If you want to use this year’s ISA then you need to act now. Here’s how

Investing tax efficiently doesn’t have to be complicated (Reuters)

The end of the tax year is near, meaning that if you’re planning to use this year’s ISA allowance you need to act fast. There’s no rollover from one tax year to the next.

ISAs – individual savings accounts – have existed for 20 years now, providing a tax-free wrapper that helps savers and investors keep more of their returns.

But they have changed a huge amount in that time and that can put off some potential savers who may worry that they don’t understand what their options are.

So here is a (brief, we promise) rundown of the facts:

Do I really need an ISA?

In the past, an ISA was one of the only ways for a taxpayer to get out of paying tax on any interest they earned.

Now, the entire savings landscape has been remodelled and basic rate taxpayers are allowed to earn up to £1,000 in interest each year without paying tax, while higher rate taxpayers get a £500 personal savings allowance.

Since many people earn far less than that, it may seem that ISAs are fairly pointless now.

However, for longer term savings in particular an ISA is still the safest place to save. The personal savings allowance protects your earnings for a year but the tax break on ISAs is forever.

What’s my allowance?

The amount you can save into an ISA is capped each year but the general cap is £20,000, so it’s not too restrictive for the average saver.

However, a few of the more specialised ISA products have lower limits, which we’ve outlined below.

What are my ISA options?

In the past you could choose between a cash savings account or a stocks and shares account – now there’s a lot more to consider.

Cash

This is the most common kind of ISA and operates exactly like a standard savings account, except that the account is protected from tax.

You can choose an easy access ISA, a fixed rate bond, a regular saver – the same options as with a standard savings account. It’s worth shopping around for the best rates, however, as some pay less than non-ISA accounts.

Each year you can save up to £20,000 in one of these.

Stocks and shares

A wide range of investment products can be held in a stocks and shares ISA but you don’t need to be a wheeler dealer to have one. There are plenty of online platforms that make it easy to manage these accounts and invest.

On top of stocks and shares, they can hold unit trusts, corporate and government bonds, and more.

There’s always some risk with stocks and shares as the value of investments can fall as well as rise. If you want to invest for the longer term then this can be a good way to do so – but it’s a personal decision.

Innovative finance

These accounts allow you to use peer-to-peer (P2P) lending platforms to loan money and earn the interest. P2P lending is seen as a way to avoid the bank entirely, with normal people lending businesses or individuals cash.

With these new ISA accounts, any returns earned can also be held in a tax-free wrapper.

Take-up so far is slow. Research from P2P platform Relendex, which specialises in the UK property market, shows just 8 per cent of people are even aware of the existence of these ISA accounts.

And in the financial year 2017-2018, only 31,000 savers opened an innovative finance ISA compared to the 2.8 million individuals who opened a stocks and shares ISA and the 7.7 million savers that put money into a new cash ISA.

Help to Buy and lifetime

Help to Buy accounts are cash ISAs designed to help first-time buyers save for a deposit. They can invest £1,200 into their account in the first month and a maximum of £200 a month after that. The government will top up their contributions by 25 per cent as long as they use the money to buy a property.

There’s a maximum government payout of £3,000 per person and these accounts are considered a cash ISA, so you can’t also save into one of those at the same time. The scheme will stop being available to new savers from December this year.

A similar but slightly different option for savers is the lifetime ISA, which can be a cash or stocks and shares account. With these, you can save up to £4,000 a year and the government tops up your contributions with 25 per cent.

But there are restrictions to that golden goose; you have to be 39 or under to open one and the money has to be used to either buy a first home or to help support you once you turn 60. Withdraw the cash before the big six-O or for any other reason and you pay a penalty that wipes out the bonus.

Can I move my money around?

This has become a lot easier in recent years. Some ISA providers now allow savers to withdraw and replace money from their ISA within a single tax year, giving people much greater freedom to use their cash without losing the break.

Check first, however, as not every provider does this. It’s also not available on certain ISA products, including the junior and Help to Buy ISAs.

If you want to move money into a new ISA account, perhaps to secure a better rate with a different provider, then you need to apply to transfer the money – don’t just withdraw it or you risk losing the tax break.

You can transfer money between cash, stocks and shares, and innovative finance accounts.

It’s actually very simple

Over the years many studies have shown that people don’t understand ISA savings and investments, or think they are too complicated.

In reality they are not and the variety of accounts just helps ensure you can find one that best fits you. So don’t put it off for yet another tax year, put your savings where the tax office can’t touch them.