Your Guide To ISAs
An Individual Savings Account (ISA) is a class of retail investment arrangement available to residents in the United Kingdom. It is a tax-efficient wrapper that shelters your money from income tax and capital gains tax. There are four main types of ISAs: Cash ISA, Stocks & Shares ISA, Lifetime ISA (LISA), and Innovative Finance ISA. The Help to Buy ISA, a subtype of Cash ISA, was closed to new savers in November 2019, but if you opened your Help to Buy ISA before then, you can keep saving into your account.
This guide will delve into the specifics of when to use a cash ISA vs a stocks & shares ISA, compare LISA with Help to Buy ISA, and outline the costs of different ISA platforms in the UK.
When to Use Cash ISA vs Stocks & Shares ISA
Cash ISA
Cash ISAs are essentially savings accounts where interest isn't taxed.They’re suitable for:
Short-term savings: If you’re saving for a near-future goal (say, a holiday in a year, a car, or an emergency fund), a cash ISA can be a good choice.
Low-risk appetite: If you’re not comfortable with the idea of investing and the potential of losing money, a cash ISA can provide a secure, albeit modest return.
Immediate access: Some cash ISAs allow instant access to your money, making them suitable if you might need the cash quickly.
Stocks & Shares ISA
A Stocks & Shares ISA allows you to invest in a variety of assets including shares, funds, trusts and bonds. The returns can be greater, but your capital is at risk.This type of ISA may be suitable for:
Longer-term goals: If you’re saving for goals several years in the future (like retirement), a stocks & shares ISA could provide higher returns than a cash ISA.
Higher-risk appetite: You need to be comfortable with the idea that you might get back less than you put in.
Beating inflation: Over the long term, investing has a better track record of beating inflation compared to cash savings.
Always remember that the value of investments can go down as well as up, and you may get back less than you invest.
LISA vs Help to Buy ISA
Lifetime ISA (LISA) The LISA is designed to help people aged between 18 and 39 save for either a first home or retirement. You can put in up to £4,000 each year, until you're 50, and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.Help to Buy ISA
The Help to Buy ISA is designed to help first-time buyers save up a deposit for their home. The government adds a 25% bonus to the money saved and you can add upto £2,400 per year. This scheme was closed to new accounts in November 2019, but if you have an account, you can continue to save into it until November 2029.If you're a first-time buyer, both ISAs have their advantages. LISA can be used for properties up to £450,000 anywhere, while Help to Buy ISAs can only be used for properties up to £250,000, or £450,000 in London. Withdrawing money from a LISA for anything other than a first home, retirement after 60, or terminal illness incurs a hefty penalty. Please note you can also transfer your Help to Buy ISA to a LISA.
Cost of Different ISA Platforms in the UK
Choosing an ISA provider depends on various factors, including costs. Here are the costs associated with some popular ISA platforms in the UK as of my knowledge cutoff in September 2021:| ISA Platform | Fees/Costs |
|---|---|
| Hargreaves & Lansdown | 0.45% platform fee p.a. on funds up to £250,000 (decreasing for larger portfolios). For shares, £11.95 per trade (decreasing with more trades). |
| Vanguard | 0.15% account fee p.a. (capped at £375 p.a.), plus fund ongoing costs (average 0.20%). |
| Interactive Investor | £9.99 flat fee per month (includes one free trade), plus additional trading costs. |
| AJ Bell Youinvest | 0.25% custody charge p.a. for funds (max £3.50 per month), 0.25% for shares (max £7.50 per quarter), plus dealing charges. |
| Fidelity | 0.35% service fee p.a. for investments up to £7,500 (decreasing for larger portfolios). |
Remember to check the most up-to-date charges and fees on the providers’ websites as they may change over time.
When deciding which ISA to choose, think about your financial goals, risk tolerance, and the costs associated with each platform.