In this week's millennial money episode, I ask financial expert Damien Fahy about the different types of ISAs and why you might want one.
What is a cash ISA?
A cash ISA is like a savings account but the interest you earn is tax-free forever. Check out last week's article / video for more information
What is a stocks and shares ISA?
A stocks and shares ISA is different in that the money that goes into the ISA can be invested into things like shares or funds (a form of a collective investment; instead of individual shares, you invest in a fund that invests in lots of shares). All the growth and any income you make from the investments are tax-free and so it is a good way of investing for the long term. A stocks and shares ISA gives you the potential to make more money than a cash ISA, but you've also got the ability to lose money. With cash however, as long as your bank or building society doesn't go bust, you shouldn't lose any money. Even then, due to the financial services compensation scheme, it is likely that you will be covered anyway.
Remember that with investing, your money can go down as well as up. There are quite a few options for investing in stocks and shares ISAs, so if you're new to investing it can be a little bit daunting.
You can invest in a stocks and shares ISA by using a robo-adviser; it's a bit of a gimmicky name, but put simply it is just an automated way of investing. Rather than having humans run your money it's effectively run by computers. They are cheap, so they will invest your money for you and pick your investments on your behalf. It is basically buy and forget, or invest and forget.
You can also invest in a stocks and shares ISA using a fund supermarket or investment broker, which give you the ISA box and then you can pick and choose what you want. It's like going to a supermarket with a trolley and you can pick and choose your own investments. Using the same analogy, a robo-adviser is getting a a takeaway in.
For more information on stocks and shares ISAs take a look at our articles:
- The best stocks and shares investment ISA
- Are stocks and shares ISAs really worth it?
- The best-performing stocks and shares ISA
What is a peer-to-peer or innovative finance ISA?
With peer-to-peer investing you are removing the middleman - the bank. In a very simplistic way, when you put your money into a peer-to-peer ISA, that money is then lent out to other people and you get a better savings rate as a result. With a peer-to-peer ISA you are not covered by the same levels of protection (as a normal ISA) as the money is not protected by the financial services compensation scheme, so it is not for everybody. An innovative finance ISA allows you to do peer-to-peer lending within an ISA, hence why it's called a peer-to-peer or innovative ISA.
What is a Junior ISA?
Junior ISAs are really aimed at parents and grandparents who want to put money aside for their children and so a Junior ISA is essentially an ISA designed specifically with children in mind. The money can be invested as either cash or stocks and shares and allows you as a parent to put money away for a rainy day for your children. A Junior ISA has a lower annual ISA limit of £9,000 for the 2020/21 tax year.
One word of warning, you've got to bear in mind that your child will have access to the money once they turn 18, so make sure that you are happy with that arrangement before you commit.
For more information on junior ISAs take a look at our article:
ISAs for first-time buyers
If you are a first-time buyer you may want to consider wither the lifetime ISA or a help to buy ISA. The lifetime ISA and help to buy ISAs are two ISAs that were created to help people get on the property ladder. There are nuances between the two and so we will go through each of them below.
Help to buy ISA
Help to buy ISAs are were phased out in November 2019 in favour of Lifetime ISAs. They were designed to help first time buyers save towards the deposit of your first house by topping up savings by 25% (within certain limits).
The lifetime ISA was introduced in April 2017 and has a dual purpose. It has been designed to help first-time buyers as well as being an option to allow you to save for retirement. Like a help to buy ISA, the government will add a 25% and you can save up to £4,000 per year in a Lifetime ISA.
Help to buy ISA vs Lifetime ISA
Both the help to buy ISA and the lifetime ISA are incredibly popular as they are the equivalent of free money and if you are a couple, you can both have a lifetime or help to buy ISA. In fact, you can have both a lifetime ISA and a help to buy ISA but you are only allowed to use the government bonus from one of them to buy a home.
What is the difference between a help to buy ISA and a lifetime ISA?
- Help to Buy ISAs are cash only but Lifetime ISAs can be stocks and shares as well as cash
- A lifetime ISA has to be open for at least 12 months before you can use the money to purchase a home but this does not apply for a help to buy ISA
- The property limit for a lifetime ISA is £450k whereas it is £250k (£450k in London) for a help to buy ISA
- If you need to withdraw money from a lifetime ISA that isn't to purchase a property or for retirement there is usually a 25% withdrawal fee, however this was reduced to 20% in May 2020 and will be reviewed again in Apil 2021
- Lifetime ISA has an age limit of 18-40
The point of this article / video is to demonstrate that there are a number of ISAs which allow you to invest or save in an efficient manner without paying tax. There are two in particular that you should explore if you want to buy a house and they are the help to buy ISA and the lifetime ISA.
If you want to find out more about the lifetime ISA or buying your first home these articles may be of use to you:
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