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.
So what exactly can you do and not do to benefit from the tax-free opportunities that ISAs present?
What is an ISA?
ISA stands for Individual Savings Account. It allows you to save money with no tax on the interest or capital gains you earn from your investment.
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 four main types of ISAs:
Cash ISAs are primarily used to keep cash reserves in a low risk environment for a multiple of 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.
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.
Innovative Finance ISAs (IFISA)*
Innovative Finance ISAs are the new 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.
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 and Innovative Finance ISAs are not as safe as cash, the rate of return is not guaranteed and, as with all investments, your capital is not guaranteed.
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. Lifetime ISA: 10 key facts for medics >
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.
There are also two specialist 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 exceptions to this.
Help to Buy ISAs
Help to Buy ISAs are aimed at helping first-time home buyers save for their deposit but they are only available until 30th November 2019. If you open one before they are withdrawn, you can save into it until the 30th November 2029 but you must claim the bonus by the 1st December 2030.
Lifetime ISA vs Help to Buy ISA
Unless you’re buying a house before April 2018, if you’re currently saving into a Help to Buy ISA you should start saving into a Lifetime ISA. 5 ISA changes doctors and dentists need to know about >
How many ISAs can I have?
Every tax year, you can put money into:
- One Cash ISA (includes the Help to Buy 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.
Unlike other types of ISAs, you can only ever have one Help to Buy ISA. You can transfer it to different providers but you cannot open more than one account at a time.
† Help to Buy ISAs are a type of Cash ISA. You cannot usually hold both a Help to Buy ISA and a Cash ISA in the same tax year although some providers allow you to split your allowance between the two.
What is my ISA allowance?
Your total annual ISA allowance for the 2017/2018 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. Just don’t exceed your annual ISA allowance or you’ll incur an unexpected tax bill!
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!).
Junior ISA allowance
The 2017/2018 Junior ISA allowance is £4,128 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 2017/18) into your own ISAs.
Children aged between 16 and 18 can hold both a Junior ISA and a Cash ISA. This means that between age 16-18 they have an ISA allowance of £24,128…an allowance higher than their parents!
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 the 6th April one year to the 5th April the following year.
Does the allowance always go up each year?
The allowance has increased annually since 2015, often significantly, but by how much is the decision of 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.
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.
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?
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 are 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 £186,560¹ (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.
Do you think you are making the most of the flexibility and tax saving opportunities that ISAs now offer? Let us know by adding a comment below.