The different types of ISA
There are four types of ISA available for adults:
- Cash ISAs
- Stocks and shares ISAs
- Lifetime ISAs
- Innovative Finance ISAs
Parents can also open a Junior ISA for their children, but this doesn’t count towards your personal ISA allowance. It’s held in the child’s name.Find out more about Junior ISAsin our helpful guide.
Below we’ll look at some of the pros and cons of each type of ISA, but remember, what’s right for you and your family will depend on your own circ*mstances. For tailored financial advice, you can book an appointmentwith a Specialist Financial Adviser from Wesleyan Financial Services.
Cash ISA
Perhaps the most simple type of ISA is the cash ISA. It allows you to earn tax-free interest on your cash savings. You can usually choose between a variable or fixed interest rate.
A variable rate cash ISA will usually have a lower rate of interest, but will allow you to withdraw money whenever you need to. A fixed rate cash ISA may provide you with a slightly higher rate, but you might need to leave your money in for a set period of time.
| A low-risk way to save | ||
|---|---|---|
| Some cash ISAs allow instant access to funds | ||
| Low interest rates mean little potential for growth | ||
Stocks and shares ISA
In a stocks and shares ISA, your contributions are invested in the stock market rather than held in cash.
Some ISAs will allow you to choose the investments yourself. Others (like our Wesleyan Stocks and Shares ISAand Wesleyan Unit Trust Managers Unit Trust ISA) are invested in funds which are managed on your behalf.
By investing your money, you may be able to grow your pot faster than in a cash ISA - and there’s no tax to pay on any returns from your investments. Like all investments though, there’s an element of risk involved. You could get back less than what you put in.
Bear in mind too that most investment ISAs recommend leaving your funds in place for a minimum of five years. That’s to allow more time for any potential growth.
| Provides greater potential for growth than a cash ISA | ||
|---|---|---|
| No capital gains tax to pay on any investment returns | ||
| Investments can go down in value as well as up, and you may get back less than what you put in | ||
| Initial and ongoing charges usually apply | ||
Lifetime ISAs
Lifetime ISAs are designed to help young adults save either for their first home or for retirement. They are only available to those between 18 and 39 years old.
You can save up to £4,000 a year in a Lifetime ISA (out of your full £20,000 allowance). The government will add 25% to your contribution, meaning a maximum ‘bonus’ of £1,000 a year.
Remember though, you can only use these savings for one of two things - and both come with conditions. If you’re buying a house with the proceeds, it’ll have to be below the value of £450,000, which can be tricky in some parts of the UK. If you’re saving for retirement, you won’t be able to touch the money until you’re 60.
If you take the money out early, or for any other reason, you’ll be charged 25% of the amount you withdraw. If you’re taking it all out, bonus and all, you’ll actually get back less than the money you paid in.
| Government contribution of up to £1,000 per year until your 50th birthday | ||
|---|---|---|
| Contributions limited to £4,000 per year | ||
| 25% charge for withdrawing early. Full withdrawal outside the contract terms would mean you get back less than you put in. | ||
Innovative Finance ISAs
An innovative finance ISA (IFISA) allows you to invest your tax-free ISA allowance in peer to peer (P2P) lending. That means your money is effectively borrowed by individuals or businesses through a lending platform.
As with most loans, there’s interest for the borrower to pay - and that interest represents your return on investment.
IFISAs can be appealing due to the opportunities to earn high rates of interest, but as with any lending, there’s always the risk of the borrower defaulting on the loan. Not all IFISA investments are protected by the Financial Services Compensation Scheme.
| Higher interest rates than some other ISA types | ||
|---|---|---|
| Investment could be at risk if borrower defaults | ||
