Are you up to speed with ISAs?

ISAs have changed a lot in the last few years. They are still one of the most tax-efficient and flexible forms of investment but, with all the rule changes and new ISA products now on the market, you’d be forgiven for feeling somewhat overwhelmed by all your options. This is always dangerous as it tends to promote inertia – keeping things simple is always the best policy! Hopefully, the summary below will promote action.

So, what exactly can you do and not do to benefit from the tax-free opportunities that ISAs present?ISAs: Your Tax-Free Saving Options

What is an ISA?

ISA stands for Individual Savings Account. Consider it as a “wrapper” that surrounds an investment which could be cash or shares or investment funds. Funds within the ISA wrapper are allowed to grow free of tax on the interest, income or capital gains.

Because it’s an ‘individual’ savings account, you cannot have an ISA in joint names. If you have a partner, you each have your own, separate ISA allowance.

How many different types of ISAs are there?

There are five main types of ISAs:

Cash ISAs

Cash ISAs are primarily used to keep cash reserves in a low-risk environment for multiple uses. You must be 16 or over to open a Cash ISA.

You can withdraw some or all of your money held in a Cash ISA at any time from the age of 16.

Stocks and Shares ISAs*

Stocks and Shares ISAs are also known as Investment ISAs or Equity ISAs. They are often used for mid-term savings or to boost retirement savings and then, later on, to generate a tax-free income to supplement a pension. Stocks and shares refer to the fact that the asset in the ISA wrapper is usually shares and/or investment funds, for instance

You must be 18 or over to open a Stocks and Shares ISA. You can withdraw any or all of the cash element of a Stocks and Shares ISA at any time, from the age of 18.

Lifetime ISAs (LISA)*

You can invest in either a cash or stocks and shares Lifetime ISA to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA.

LISA’s represent a massive ‘giveaway’ – the government will add 25% on top of every annual contribution that you make into the fund! Lifetime ISA: 10 key facts for medics >

You put in the maximum £4,000 and the government will add another £1,000 – free money! Bear in mind, however, that if you are considering using your LISA to create a separate fund specifically for retirement (rather than buying a house) you should take advice as a personal pension may be a better approach in this situation.

You can withdraw money from your LISA for purposes other than purchasing your first property but, if you are aged under 60, you will not get the government bonus (nor any interest or growth on the bonus) and a 5% charge will be payable.

Innovative Finance ISAs (IFISA)**

Innovative Finance ISAs are the new(ish) kid on the ISA block. They give you an option to use peer-to-peer lending platforms to get tax-free returns on your investments. In simple terms, Peer to Peer lending is similar to saving with a bank but pays higher rates of interest. However, and very importantly, unlike a deposit account, Peer to Peer lending does entail some risk to your money.

Peer-to-Peer lenders match up savers, who want to lend, with borrowers – either individuals or small businesses. Read more: Peer to peer lending explained >

You must be 18 or over to open an Innovative ISA. You can withdraw any or all of the cash element of an Innovative ISA at any time from the age of 18.

* Stocks and Shares ISAs are not as safe as cash, the value of investments can fall as well as rise. You may not get back what you invest.

** Innovative Finance ISAs are not as safe as cash, the rate of return is not guaranteed. Peer to peer lending is not covered by the Financial Services Compensation Scheme (FSCS). Your capital and interest are at risk and you may face a delay when you wish to withdraw funds.

We recommend you take financial advice prior to investing.

Junior ISAs

A Junior ISA is a long-term, tax-free savings account for children under the age of 18 who do not qualify for a Child Trust Fund. There are cash Junior ISAs and stocks and shares Junior ISAs; a child can have one or both types.

Money in a Junior ISA belongs to the child. They can take control of the account when they are 16 but they cannot take money out of it until they are 18, although there are some exceptions to this.

The 2019/2020 Junior ISA allowance is £4,368 per child. Contributing to a Junior ISA does not affect your own annual ISA allowance; you can still put up to the maximum allowed each tax year (£20,000 in 2019/20) into your own ISAs.

Children aged between 16 and 18 can contribute to both a Junior ISA up to the limit of £4,368 (held in stocks and shares* or cash) and a cash-only ISA (up to the limit of £20,000). This means that between age 16-18 they have an ISA allowance of £24,368…an allowance higher than their parents! Remember that money saved into a Junior ISA belongs to the child at age 18.

A gentle word of caution…

If you are concerned that the potential fund represents one large extended party/gap year to end all gap years – as opposed to a deposit on a house or university fees, then think long and hard about saving into a junior ISA. You may wish to consider alternatives where you, as the parent, retain parental control!

Help to Buy ISAs

N.B. Help to Buy ISAs are no longer available unless currently in place.

What is my ISA allowance?

Your total annual ISA allowance for the 2019/2020 tax year is £20,000.

It’s up to you whether you save your full allowance in one type of ISA (*) or split it across some or all other types of ISAs (see below). Just don’t exceed your annual ISA allowance or you’ll incur an unexpected tax bill!

* Remember, investments in a Lifetime ISA are capped at £4,000 from the individual (as distinct from the government ‘top-up’ element) and count towards your overall ISA allowance. 

As of the 6th April 2016, if your ISA is ‘flexible’, you can withdraw money from it and reinvest the same amount back into it in the same tax year without the replaced funds counting towards your annual ISA allowance (subject to the ISA providers terms and conditions of course!).

How many ISAs can I have?

Every tax year, you can put money into:

  • One Cash ISA
  • One Stocks and Shares ISA
  • One Innovative Finance ISA, and
  • One Lifetime ISA

You cannot, however, contribute into more than one of the same type of ISA in any one tax year, even if you have other accounts opened in previous tax years. In other words, you cannot put money into two different Cash ISAs in the same tax year but you can have multiple Cash ISAs over a period of time.

Can I utilise last year’s ISA allowance this tax year?

No, you can’t. Your ISA allowance runs per tax year and cannot be carried forward into the next tax year or retrospectively carried back to a previous tax year. A tax-year is from the 6th April one year to the 5th April the following year.

Does the allowance always go up each year?

With the exception of the Junior ISA allowances, ISA allowances haven’t increased since 2017/18 when it increased to the current limit of £20,000. Any future increases will be down to the incumbent Chancellor of the Exchequer!

Can I transfer my ISA to another ISA?

Cash ISAs and Stocks and Shares ISAs

You can transfer existing savings to a different type of ISA or to the same type of ISA. You can also transfer your ISA from one provider to another at any time. This must be arranged by the providers of your ISAs.

  • If you want to transfer savings you’ve invested in an ISA during the current year, you must transfer all of it.
  • If you want to transfer savings from previous years, you can transfer all or part of your savings.

Innovative Finance ISAs

You can transfer your Innovative Finance ISA savings to a different type of ISA or another Innovative Finance ISA. You can also transfer cash from your Innovative Finance ISA to another provider, but you may not be able to transfer other investments from it.

Lifetime ISAs

If you transfer cash and assets from a Lifetime ISA to a different ISA before the age of 60, you will have to pay a withdrawal fee of 25%.

A cautionary note…

Do not withdraw money from a Stocks and Shares ISA, Innovative Finance ISA or Lifetime ISA and try to invest it into another ISA without taking advice. If you do, any amount that you reinvest will count as payment towards your ISA limit for that tax year, and you will lose any tax-free benefits from the year you originally invested the money.

It’s also worth noting that some ISA providers only allow whole transfers and not part transfers.

Junior ISAs

You can transfer funds from an existing Child Trust Fund into a Junior ISA. You can also transfer money from one Junior ISA to another but you cannot transfer money from a Junior ISA to an adult ISA. Junior ISAs automatically turn into an adult ISA when the child turns 18.

If I have a number of different ISAs of the same type, can I amalgamate them into one?

Cash ISAs

If you have several Cash ISAs covering a number of tax years, you can amalgamate them without any loss of tax concessions, providing the transfers are arranged correctly.

Stocks and Shares ISAs and Innovative Finance ISAs

Historically, ISAs have been built up over the years with accounts being created with different providers.

Today, investment platforms can be used to amalgamate an individual’s various ISA accounts. Using an investment platform, your Stocks and Shares ISAs can be re-registered under one provider (known as a ‘wrapper’) but the funds are retained within their individual account.

With your funds under one roof, you have greater flexibility and choice of funds. You also get fewer reports!

Another cautionary note…

You should always get advice before you amalgamate any Stocks and Shares ISA or Innovative Finance ISA accounts to make sure that you have considered all aspects including investment risk, performance, charges and, of course, any potential loss in the tax advantage you have built up in your ISAs.

What happens to my ISA when I die?

ISA benefits can now be passed on to spouses or civil partners. In addition to their own individual annual ISA allowance, the surviving spouse or partner is entitled to an extra ISA allowance (called the Additional Permitted Subscription) which is equal to the value of the deceased’s ISA.

This is the case even if the spouse/partner doesn’t inherit the deceased’s actual ISA.

Use it or lose it!

ISAs were introduced in April 1999 to allow people to save money without Mr. HMRC being able to touch it. The ISA allowance then was £7,000. Today, 18 years later, it is £20,0000.

Assuming you were eligible to contribute to an ISA in April 1999 and you had made full use of your annual allowance each year since then, you would now have in excess of £206,560 (and that figure doesn’t include capital growth!).

As you can contribute through any combination of regular or lump sum contributions, make sure you use as much of your annual allowance as possible. If you have not maximised your contributions by the end of the tax year you lose any unused allowance.

Remember, whilst your ISA allowance runs between tax years, your ISA investments can be reviewed and your allowance fully utilised at any time.

Interest rates on Cash ISAs, and the options available for Stocks and Shares ISAs, Lifetime ISAs and Innovative Finance ISAs, do also vary quite considerably, so it’s wise to speak to your financial adviser to get the full picture.

Feeling the ISA overload?!

If getting your head around ISAs and deciding which ones are right for you is, understandably, just too complicated and confusing, do seek advice because they really do offer a meaningful tax-free investment opportunity that we should all fully consider for the whole family.

By way of encouragement, you only have to put “ISA millionaire” into Google to see that investing in ISA’s could produce a significant fund in later life!

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