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 our video 'What is the difference between a Cash ISA and a savings account?' 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; which is 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 gives 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 like getting 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 2022/23 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 the Lifetime ISA. The Lifetime ISA was created to help first-time buyers get onto the property ladder or to help with saving towards retirement. Some first-time buyers may have also taken out the Help to Buy ISA before it was withdrawn in November 2019 but it can still be used to purchase a property until 2029. There are nuances between the two ISAs and we will go through each of them below.
Help to Buy ISA
Help to Buy ISAs were phased out in November 2019 in favour of Lifetime ISAs. They were designed to help first-time buyers save towards the deposit of their first house by topping up savings by 25% (within certain limits). You can still save into a Help to Buy ISA until 30th November 2029.
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. 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. But, if you are a couple, you can both have a Lifetime ISA and use both LISAs towards the purchase of your first 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
- 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
- Lifetime ISA has an age limit of 18-40 (the day before your 40th birthday)
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.
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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