An ISA is a special kind of savings account that will allow you to save up to twenty thousand pounds a year, without having to pay any taxes on the interest the account accrues. This type of savings account was first introduced back in 1999 and was designed to encourage people to save for retirement.
What Are ISAs?
So, what does ISA mean? ISA stands for individual savings account. While this type of account is designed to help you save for a major purchase or retirement, as we mentioned, it does have a cap regarding how much you can put away. For some, the twenty thousand pounds a year cap may be seen as a major drawback.
To learn more about ISAs, click here to read our article on what does ISA mean?
It will be up to the account holder whether they want to save in entirely stocks and shares, entirely in cash, or they can try out the new innovative finance ISA. They can also choose any combination of the three account options available, just as long as they don’t exceed the yearly deposit limit.
There are two additional ISA account options; the lifetime ISA and the help to buy ISA. Both account types have different limits and rules regarding how much you can save each year.
Considering the average person saves around five thousand pounds a year, the twenty thousand limit easily exceeds the amount saved by the average UK family.
You can also choose to add a help to buy ISA and a lifetime ISA in addition to a standard individual savings account, however, these accounts have different rules and limits regarding how much you can deposit each year. Additionally, the amount of cash you deposit into both the help to buy ISA and the lifetime ISA will count toward the yearly allowance of the standard individual savings account.
Click here to learn more about ISA comparisons to find the right type of savings account for you and your family.
Is An ISA Right for You?
These days, getting a decent return on your savings can be difficult, which is what makes having an ISA more important than ever.
During each tax year, you will be able to deposit up to twenty thousand pounds into your ISA, with tax-free interest. Unfortunately, if you don’t use up your allowance for that year you won’t be able to deposit any extra funds the following year.
In terms of account variety, you’re allowed to open one innovate finance ISA, one stocks and shares ISA, and one cash ISA. There is no limit regarding how many ISAs you can open in your lifetime, but you will be limited in terms of how many you open per year.
If you decide to take funds from an ISA you will be allowed to replace those funds during the same tax year without it counting toward your twenty thousand pounds allowance. Before 2015, money could not be replaced if it was removed from an ISA.
Thanks to this new account flexibility, these savings accounts will now appeal to people who previously opted to bypass the ISA in favor of more forgiving savings options.
What are Fixed Rate ISAs?
This type of account features a specific interest rate for a determined period of time. Fixed rate accounts are a great choice when it comes to taking advantage of your annual allowance, but only if you’re able to comfortably survive without touching those funds for a period of one to five years. These accounts typically have a higher interest rate because banks assume that the money will be stored for the whole term, which means it can invest your money for a longer period of time, equaling more profit for the bank.
The biggest drawback that comes with this type of ISA is the large penalty you can get hit with if you decide to take your funds out before the term is over. Additionally, you may not be able to transfer the funds into a fixed rate ISA from a cash ISA. However, this can vary from provider to provider.
Do You Need an ISA that Offers Instant Access to Cash?
If your answer is yes, then an instant access cash savings account may be a perfect option for you. This type of savings account works just like a basic ISA, however, you’ll be able to access your money easily, and quickly, instead of requesting a withdrawal from the provider.
Considering you’ll have easy access to your funds, you may end up losing out on the interest rate, which is usually higher on fixed term accounts.
To learn more, click here to read about average ISA rates.
Saving for Your Child’s Future
If you want to start saving for your child’s education, their first car, or their first home, then a junior individual savings account is the way to go. The best thing about the junior savings account is that the child will not be able to touch the funds until they turn eighteen years old. On their eighteenth birthday, the junior account becomes a normal ISA.
Stocks and shares ISAs allow you to invest your full twenty thousand pounds allowance. These accounts are available in a couple of forms: self-selected fund accounts and ISAs from direct providers.
Stocks and shares accounts allow you to put your money in the stock market, unlike cash ISAs. This means the amount you deposit can go down or up with the share price. With this type of account, you won’t have to actively monitor your funds daily. Instead, you’ll trust the provider to invest your money wisely, for you. However, this type of account can be very risky considering prices can decrease or increase during the year, which is why returns are not guaranteed. You should also keep in mind that the capital you pay in will not be protected like it will with a cash individual savings account.
Self-selected fund individual savings accounts can be a great option if you want total control of the investments you make. These accounts are usually best suited to more experienced investors since they come with a higher level of risk and the capital will not be protected.
The New ISA Account Option
The innovative finance ISA is relatively new to the market, having been launched in 2016. This account provides a way to invest money without utilising the stock market and without saving cash. Instead, this type of account uses peer to peer lending. This means your funds will be borrowed by individuals and companies who are looking for a better rate. Essentially, the innovative finance account cuts out the middleman.
This type of ISA is quickly rising in popularity, mainly because of the high rates of interest. The rate you’ll get is determined by the credit history of the borrower. If the borrower has excellent credit then you’ll get a lower rate back. If the borrower has average credit, then you’ll get higher interest back, usually around six percent.
This savings account comes with a certain level of risk. If the individual or company that borrowed from you ends up defaulting on the loan then you could be left with less money back. Often, your funds will be spread between several debtors in order to lessen the risk of this happening.
Other ISAs are protected by the Financial Services Compensation Scheme, but the innovative finance ISA is not.
Tips and Tricks to Get the Most Out of Your ISA
Currently, as many as ten to eleven million people open an ISA each year, however, many people will leave their investment alone for years at a time. Financial advisors often recommend reviewing your ISA annually in order to determine if you’re investing wisely and whether or not your investments have done well for the year, or if moving your funds around may be needed. Of course, this heavily depends on the type of ISA you have.
Typically, as the end of the tax year draws closer, investors often make a mad dash to stuff their accounts with new investment options. But financial advisors and ISA brokers tend to think more strategically. For most people, drip feeding funds into their savings account over a long period of time is a better way to invest their annual allowance as opposed to depositing twenty thousand pounds all at once. Drip feeding tends to take the emotion out of investing. Doing so means you won’t have to worry about timing the market.
The Benefits of Drip Feeding Your ISA
When you decide to deposit a determined sum to invest each month, there will be times when you purchase funds and stocks when they are more expensive, and periods in which you purchase shares at a cheaper price. When you drip feed your funds into a stocks and shares ISA, you’ll be able to take advantage of their ups and their downs using a method that’s referred to as pound cost averaging. If you decide on a fixed amount to deposit every month you’ll be able to purchase more units when the value of funds falls, thus providing the possibility of bigger and better profits when they rise in value.
If you’re already concerned about investing in high markets, then steady investment will be especially important. Considering timing the market just right is impossible, with drip feeding, you can avoid the risk of paying in all of your funds at a market peak.
If the deadline for ISAs is already looming and you have yet to set up regular deposits, don’t worry just yet. One of the simplest ways to meet the deadline is to deposit a cash lump sum, investing it at your leisure.
Too many people stress over finding the right investment before the tax year comes to a close. However, it’s entirely possible to open an ISA with cash, then drip feed into it over a period of several months.
For more information on how you can get the most out of your ISA, click here to read about the best ISA tips and investment options.
Reaching Your Savings Goals
The individual savings account assets will only continue to grow if your account is earning competitive interest every year, not just on the current year’s allowance. Most types of cash ISAs will accept transfers in. Before you commit to signing up make sure your ISA provider starts paying interest the day you sign up. The provider has up to fifteen business days to process your application before you begin earning any interest on your funds.
If you’re new to ISAs and you’re not sure you’re getting the best rates, always shop around and speak with an ISA provider regarding their transfer options, ISA account options, and interest rates. Never be afraid to ask questions in order to ensure you choose the right type of individual savings account that will allow you to purchase that house you’ve always wanted or one that will allow you to save more for retirement.