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ISAs - The Basics Explained

The range of available ISA products, their features and terms, can be confusing. Here are the basic products and their annual limits

James Gard 11 March, 2019 | 8:30AM

Saving money

How can savers and investors make the most of their ISA allowance? Read our special report to find out

While the concept of a tax wrapper is relatively simple, and the overall £20,000 limit is a nice round number, the range of ISA products is potentially confusing to new investors. Here we break down the basics.

The ISA is simply a tax wrapper in which you can put cash and a range of investment products. A large number of companies offer Individual Savings Accounts, from the High Street banks to online-only start-ups. The government website www.gov.uk has a detailed explanation of ISA rules.

While the overall ISA limit is £20,000, there are different varieties of ISA, some with different limits which can count towards your annual allowance:

What Are The Main ISA Types and Their Limits?

The Junior ISA is the only one of these products that can be used IN ADDITION to the annual limit. You can have £10,000 in cash and £10,000 in shares, for example, to meet the overall £20,000 limit. The Lifetime ISA, the Help to Buy ISA and Innovative Finance ISA form part of your overall allowance. 

For current tax year 2018/2019:

  • Cash ISA - £20,000 

  • Stocks and Shares ISA - £20,000

  • Lifetime ISA - £4,000*

  • Junior ISA - £4,260

  • Help to Buy ISA - £3,400 for year one, £2,400 thereafter**

  • Innovative Finance ISA - £20,000***

* Government contributes £1,000 maximum a year on top of this. Available to those aged between 18 and 39. Other rules apply.

** Being phased out from November 2019. Other rules apply

*** Capital at risk as this ISA isn’t part of the Financial Services Compensation Scheme, which protects savers from a provider going bust - up to a per-person limit.

Beware the Rules

The rules around Lifetime and Help to Buy ISAs are complex and you run the risk of losing the Government bonus if you don't stick to them. For example, with the Lifetime ISA, you can buy a first home up to £450,000 using the ISA as a deposit OR withdraw the whole amount tax free when you reach 60. If you breach these rules, you lose the Government bonus, any interest or capital gains AND have to pay a 5% levy to the Government. So it's worth considering if you will find these terms restrictive over the potential 42-year lifespan of the product - from age 18 to 60.

Also, the rules surrounding how Junior ISAs are accessed can be confusing. We break down these rules here in our frequently asked questions section.

What's the right ISA for me? You might be saving for a house deposit, investing for retirement, building up a "rainy day" fund or saving for a child's education. The flexibility of the ISA wrap is a plus point here. But different products carry advantages and disadvantages that some people may find restrictive.

For this reason, we suggest that ISA buyers do their research thoroughly using provider websites, www.gov.uk, speak to a financial adviser or consult the free, government-sponsored Money Advice Service.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

James Gard  is content editor for Morningstar.co.uk

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