How to pick an Issa that’s right for you . set off on the road to riches
By Ruth Jackson-Kirby
dmg media (UK)
THERE is an Isa out there for every saver, but working out which one is for you is not always straightforward. The Isa family has grown over the years so there are now five different types to choose from. They have been around for 24 years, with various new additions along the way. All Isas are designed to help you protect and grow your wealth. But each one will help you with different goals. Building up a rainy day fund CASH Isas are perfect if you are growing a small nest egg or would like a home for savings that you will need in the next few years. They work in much the same way as a standard savings account. You open an account, pay in some cash and receive interest in return. As with all savings accounts, some Cash Isas allow you to access your cash whenever you choose and without giving notice, whereas others lock your money away for an agreed period of time. The only key different between Cash Isas and other savings accounts is that in the former all interest earned is tax-free. Cash Isas had fallen out of favour in recent years and savers were just as happy putting their money in a standard savings account. That is because they were earning such little sums of interest that few were having to pay tax anyway. All savers have a personal savings allowance on top of any Isas they hold. Savers who are basic-rate taxpayers can earn up to £1,000 in interest without paying tax, while higher-rate taxpayers can earn up to £500. For most, this was adequate. But as interest rates have started to rise, it is now much easier to breach the personal savings allowance and Cash Isas are showing their value once again. For example, if a higher-rate taxpayer put £20,000 into a standard savings account paying three per cent, they could end up with a tax bill of £40. But if they save the same amount into a Cash Isa, they would pay no tax. Which Cash Isa is right for you will depend on why you expect you’ll need to withdraw your money. If you might need it immediately, an easy access account is best. The best rates on these are currently just above three per cent. If you will not need your money for a while, you may be better off with a fixed-rate cash Isa, which locks away your money for a few months or years. The longer you fix for, the better rate you will likely get. However, the rewards for fixing for a few years are not much greater than for one or two, so you may not feel it is worth fixing for longer. You can currently get a one-year fixed rate bond that pays over four per cent. The best five-year fixed rate Isas today pay around 4.2 per cent. Looking long-term to grow your wealth CASH Isas are great for money you want to access in the next five years. But if you can lock away your savings for at least five to ten years, a Stocks and Shares Isa may be a better option. Over most periods, investing has proven more lucrative than earning interest on savings. For example, if you had invested in a globally diversified portfolio of companies since 2005, you would have made around 10 per cent a year on average. If you had left your money in a savings account, you would have made around 1.5 per cent a year on average. Investing, however, requires a particular mind-set. With cash savings, you know exactly how much you have in the bank at any time. With investing, the amount you have will vary from day to day. You have to be able to accept that you could lose money and there is an element of risk involved. Beth McCarthy, 31, an IT quality assurance manager from Gloucestershire e, started investing using an Isa r years ago. ‘There are a few things trying to achieve,’ she says. ‘I’m a er and I like to know I’ve got a nice hion behind me just in case. I ld also like to save towards the t house move, whenever that y be. And lastly, I’m building a fortable life for retirement.’ Beth opted for an Isa rather than a general investment account so she could hold on to more of her returns to accelerate the growth of her nest egg, rather than having to hand some over to the taxman. You can open and manage a Stocks and Shares Isa through an investment platform or through a bank. Which one is best for you will depend on how much control you want over what you est in, which offers the best value what level of customer service will require. r an excellent round-up of the ons available from our sister webThis is Money, go to thisismoney. k/platform. on’t be put off if you have never ested before. There are a growing ber of options designed for begininvestors. These do not require you to pick funds, make predictions about the economy or buy and sell shares. You simply state how much risk you feel comfortable with and how long you have to invest and then you are allocated a portfolio that meets your needs. If you are saving for your first home A LIFETIME Isa can help give your savings a significant boost if you are working towards buying your first home. There are two types – one keeps your savings in cash and the other invests it. Lifetime Isas can be very generous for some savers. However, there are very strict limitations. Toby Walne explains the full rules, and the pros and cons on page 6. Matilda Littler, 27, a project manager from Hertfordshire, opened a Lifetime Isa to help save for her first home. She receives a Government bonus on top of whatever she is able to save herself. ‘I’ve had my Lifetime Isa for around three years and have got £3,000 as a Government bonus,’ she says. ‘I also benefit from an interest rate on my savings of 2.85 per cent.’ Looking ahead to your retirement PENSIONS are likely to be the best option for most people saving towards retirement. Workplace pensions in particular allow you to benefit both from tax relief and contributions from your employer. However, if you are self-employed and so do not have a workplace pension – or if you’d like to supplement your workplace pension, a Lifetime Isa can come in handy. They are designed to support retirement saving as the money saved into them can only be accessed to use towards your first home or when you reach the age of 60. Read our Lifetime Isa guide for more information. Saving for your child’s future CHILDREN can have their own Isa too. The Junior Isa (Jisa) can be opened from birth until a child turns 18. Annual deposits are limited to £9,000 and the money can’t be accessed until they are 18. Protecting a child’s money from tax may seem odd but they are subject to the same tax rules as adults. Plus, if a parent deposits money into a child’s account and it earns more than £100 interest, anything over £100 will be taxed at the parent’s income tax rate. Tucking their savings into a Junior Isa means you do not have to worry about tax today and, as their nest egg grows, you know it will always be tax-free. Junior Isas automatically convert into adult Isas when the child reaches age 18. You can choose from a cash or investment Junior Isa or have one of each. As the money is locked away long-term an investment Junior Isa offers the better opportunity for growth over almost two decades. ‘A major advantage of a Junior Isa is that any capital gains or dividend income on investments will be protected from tax,’ says Alice Guy, personal finance editor at wealth platform Interactive Investor. ‘That could potentially save thousands over time, especially once a child becomes an adult and begins to pay their own taxes,’ she adds. See our full guide on page 7. For something a little different THE final member of the Isa family is the Innovative Finance Isa. These accounts allow you to invest your Isa allowance in peer-to-peer (P2P) lending. This means your money is lent to borrowers who pay it back to you in instalments plus a set amount of interest. An Innovative Finance Isa can offer much higher interest rates than a Cash Isa. For example, Crowd2Fund are advertising an annual return on its IF Isa of 11 per cent. But you are taking on a lot more risk. You could lose your money if a borrower defaults. These Isas are not covered by the Financial Services Compensation Scheme (FSCS), which means that if the P2P company goes bust you may not get your money back.