The ISA family grows to 6 members – but which one is best?


From April 2017 there will be 6 different ISAs available to savers and investors, so here is a brief overview of what each one will do and who they are suitable for.

Of course, with the end of the tax year looming, the most immediate action for investors to take is to make sure they make the most of this year’s ISA allowance before it disappears forever.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

‘The Chancellor’s fiscal promises may be falling like dominoes, but you can’t knock the way he has opened up new ways for people to invest for their future and save tax at the same time.

Over the last 20 years the ISA has become a vital pillar of the savings system, and this government is building on that success to bring even more people into the savings fold, while also allowing existing savers investors to shelter more of their money from tax. Combined with the cut in capital gains tax, it’s probably the best time in living memory to be an investor from a tax point of view.

The new Lifetime ISA will give investors greater choice when it comes to investing for the future, and it’s certainly worth chewing over how to use this new addition to the ISA family.

However right now ISA investors have a more pressing matter to deal with- the rapidly approaching end of the tax year. In the next two weeks they need to take up their current ISA allowance, or lose it forever.’

The ISA family

  1. Cash ISA

Suitable for:

  • building up a rainy day fund
  • short term cash needs
  • those over 16 years of age
  • maximum of £15,240 in 2015/16 and 2016/17 and £20,000 in 2017/18

The humble cash ISA is still the best way to build up a rainy day fund because it can be withdrawn at any time to cover emergency costs. One of the reasons people save into a Cash ISA is to build up savings for a first house purchase, but the government bonus on the Lifetime ISA and the Help to Buy ISA make these more attractive ways to save for that specific purpose.

Interest rates on all cash products are currently measly. While that means the income tax saving provided by a Cash ISA is minimal right now, it is still worth using the tax shalter because this won’t necessarily always be the case. You also have the optionality to switch into a Stocks and Shares ISA at any point.

  1. Stocks and Shares ISA

Suitable for:

  • investing to meet medium term goals like children’s university fees
  • investing for retirement
  • investing in retirement
  • those over 18 years of age
  • maximum of £15,240 in 2015/16 and 2016/17 and £20,000 in 2017/18

The Stocks & Shares ISA is a stalwart of medium and long term saving because is it tax-efficient and extremely flexible. It is available to everyone over the age of 18 and can be withdrawn tax-free at any time, and for any purpose.

This makes it suitable for saving for a vast range of purposes, including school and university fees, helping to pay off a mortgage, or for retirement. The new £20,000 ISA allowance from 2017 will be a real help for people who want to save sizeable chunks for their future while shelter their investments from UK income and capital gain tax.

While a Lifetime ISA may also be considered for retirement for younger investors, the government top up will only be available for those under 50, while people find that their 50s is a key time to catch up on retirement savings when income is peaking and other costs are falling out of monthly budgets.

Retired investors can also make use of Stocks and Shares ISAs to squirrel away excess income and/or to reinvest their pension tax free lump sum to boost their annual income.

  1. Junior ISA

Suitable for:

  • under 18s only
  • building up savings for a child for
  • university fees and costs
  • house deposit
  • gap year, first car or other large spending needs
  • conversion into an adult ISA
  • can accept transfers from Child Trust Funds

The baby of the family, the Junior ISA is a £4,080 allowance available to children from birth up to the age of 18, which automatically converts into a Cash ISA or Stocks & Shares ISA at age 18. The Junior ISA has proved popular with families looking to build up a nest egg to give their children a head start in the savings race.

  1. Innovative Finance ISA (arriving April 2016)

Suitable for:

  • income seekers willing to take risk
  • over 18s
  • maximum of £15,240 in 2016/17 and £20,000 in 2017/18

From April, investors will be able to invest in peer to peer loans and crowd-funding debt securities within an ISA, thereby receiving interest from these loans tax-free. The Innovative Finance ISA will appeal to investors looking for higher rates of interest than is available on cash and government bonds, but who are willing to take on the risks associated with lending directly to companies and individuals.

  1. Help-to Buy ISA

Suitable for:

  • specifically for first time buyers looking to build up a deposit for a house
  • regular cash savers
  • over 18s
  • maximum of £1,200 in first month and £200 a month thereafter up to £12,000.

The Help to Buy ISA has been available since 1st December 2015, and new accounts can be opened until April 2019, with additions to existing account permitted until April 2029. The government adds £1 for each £4 you put in, but only at the point at which you purchase the property.

So far the scheme has been very popular with 350,000 savers signing up already. However when the Lifetime ISA arrives in April 2017 it is likely to steal the Help to Buy ISA’s thunder, indeed investors will be able to transfer existing Help to Buy ISA funds into a Lifetime ISA at that stage. This ISA is specifically for first time buyers who are looking to regularly save into a cash account for the purpose of purchasing a property.

  1. Lifetime ISA

Suitable for

  • investors looking to save for purchasing a first house, or saving for retirement
  • withdrawals are tax-free like other ISAs if used to purchase a first property, or after the age of 60, otherwise there is a 25% tax charge
  • people aged 18 to 50 (you have to be under 40 to open the account initially but will be able to top up and get a government bonus up to the age of 50)
  • arriving April 2017
  • maximum of £4,000 (£5,000 including the government top up)
  • falls within overall £20,000 ISA limit in 2017/18

The new Lifetime ISA will help younger investors save for a house or for retirement. Like a Help to Buy ISA it comes with a £1 government top up for each £4 saved, but unlike the Help to Buy ISA you get this top up at the end of the tax year. Other differences include the fact you can invest in stocks and shares or cash (Help to Buy ISA is just cash) and you don’t have to save each month, you can put a lump sum each year.