What is an ISA?

VIDEO: What is an ISA, what are all the different types, and which one is the best for you? We're back at the whiteboard to explain

Holly Black 22 March, 2021 | 10:36AM
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Holly Black: Welcome to the Morningstar Investment Board. I'm Holly Black. Today, we are talking ISAs. ISA, Individual Savings Account, you've probably heard of it, you've probably got one, you might not realize there's about 50 types you can have, slight exaggeration. Why do you want an ISA? Well, it's tax free. So, any returns you make are not subject to the tax man, you can put up to £20,000 each tax year in there. So, tax year runs from April 6th to April 5th. Lord knows who first decided that. So, what type of ISA do you want. I don't know what you want, but I can tell you what you could have. So probably the most common type is a cash ISA. This can be opened by anyone aged 16 or over, it's super safe, you just give your money to a bank, or building society, and they'll give it back to you.

The payoff, the trade-off there is that the rates are super low, you're probably only going to earn maximum around 1%, so far. So, this is not the one to ramp up your returns. But if you're a bit nervous, and you don't like the idea of investing, then this will let you sleep at night. So probably after that the next most common one is a stocks and shares ISA. Which is a bit misleading because you can open this with, also with a bank, with a broker or the fund supermarket and you can invest in stocks and shares, but also funds, investment trusts, ETFs. So, this one, you can obviously make a lot more than 1%. But it comes with all the usual risks of investing, that your money could go down, as well as up.

It was all quite simple until a few years ago, that was kind of all you could get. And then people started getting a bit creative. So, first, I introduced the how to buy ISA, HTB. This was for first time buyers, and it was a way to help people get on the property ladder. So, limits on this one was slightly different, you had to be 16 or over. You could save £200 per month, and the government would give you a nice bonus of 25%, when you came to buy a house up to a maximum of 3,000. They are now stopping this if you have one, you have till 2029 to use it but you can't open a new one anymore. However, if you are still trying to get on the property ladder, you can instead open a lifetime ISA.

This is an account that you can put money into, you can put up to 4,000 a year into this one. It can only be used for two reasons that money, it can be used to buy your first home, or it can be used for retirement. Otherwise, if you access it, access the money before age 60. And you're not buying your first house, you forfeit the 25% bonus.

Next one is a junior ISA. Unsurprisingly, this is for junior people, this is for children, you can open this, literally from the moment your baby is born. If you're so inclined, before you even you probably have to give them a name first. And the money can stay in a junior ISA until the child turns 18, at 16 they can take control of it, they can choose where it's invested or which account it goes into. But they can't get the money out till 18. So worth having a sensible conversation before that birthday, before they rush out to the pub. You can now save an incredible £9,000 a year into a junior ISA, you can put it into cash where the rates are more generous than adult accounts, but still not great or you can invest it. If you don't do anything with it at 18, it just turns into an adult ISA nothing, nothing else exciting happens.

And the last one is an innovative finance ISA. And these ones can be used for peer to peer investment loans, some crowdfunding, not the crowdfunding projects where you give a local artist 10 quid and you get a 5% off some prints, but genuine equity crowdfunding that is more of a business opportunity. These only came in very recently a few years ago. And that was to kind of encourage some growth into the sector as sort of a halfway house between the stock market and, and cash accounts. So, the rates on offer are better than cash, the returns perhaps are not as potentially as exciting as in the stock market, but there are risks associated to it.

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.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk