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You have probably heard about ISAs (Individual Savings Accounts) but do you how they work and what benefits they can provide to your savings.

The ISA: The Basics. There are four types of ISAs for adults and two types of Junior ISAs for under-18s.

Cash ISA

Cash ISAs are in the main sold by high street banks and building societies as a tax-efficient way of saving money, whilst still giving you instant access to your money. The growth rate on a Cash ISA is traditionally low when compared to other saving products, but they counterbalance this off against how safe and secure they are, with relatively low financial risk.

It is estimated by Gov.uk that in 2018-2019, over £40 billion was saved within a Cash ISA product.

Stocks and Shares ISA

Stocks and Shares ISAs can hold a wide range of investments within their wrapper (product), including stocks and shares, bonds, and funds. Over a span of a couple of years, stocks and shares ISAs are more likely to outperform a cash ISA, but they usually do come with more financial risk.

Stocks and Shares ISAs are usually attractive for people looking for higher growth with their investments but willing to accept an element of financial risk. When investing in a stocks and shares ISA or switching products, it’s advisable to get professional advice on the most suitable product for you. A financial adviser will be able to assess your attitude to financial risk and recommend appropriate products for your needs.

Lifetime ISA

A Lifetime ISA (LISA) is a flexible, tax-efficient and affordable way to save for a first-time buyer or later life. You can only open a Lifetime ISA between the ages of 18 to 39 years’ and they replaced the previous Help to Buy ISA.

With many Lifetime ISAs, you can choose to save cash or invest in the stock market, and as with other ISAs, your money can grow free from UK tax. The real benefit is a 25% government bonus worth up to £1,000 a year.

You can only invest up to £4,000 a year within a LISA.

Innovative Finance ISA

An Innovative Finance ISA (IFISA) allows you to make peer-to-peer (P2P) lending investments within a tax-free wrapper. A peer-to-peer investment means lending your funds to individuals or businesses for an agreed interest rate on repayment.

Junior ISAs

There are two types of Junior ISAs, cash or stocks and shares ISA. Junior ISAs are only available to under-18s and you can only invest £9,000 per tax year. The allowance does not come off your tax allowance of £20,000 as you are investing for the future of a child. Another stipulation with a Junior ISA is that the funds cannot be withdrawn until the holder’s 18th birthday.

The ISA Allowance

The total amount of money you can save in ISAs in the current tax year is £20,000. This is known as the ISA allowance. You can hold a number of different ISAs, but you can only invest in one type of ISA i.e., you can invest in one stocks and shares, one cash, one lifetime and one innovative ISA per tax year and not more than £20,000 in total across all of the products.

Some cash ISAs though are flexible. Meaning that you can withdraw and replace your money without affecting your yearly ISA allowance, as long as you replace the funds within the same tax year. With stocks and shares ISA, if you withdraw your funds but then look to re-invest again later, this will still count towards your £20,000 allowance.

For example
You invest £10,000 into your stocks and shares ISA, meaning you still have £10,000 left of your tax allowance.

Two months later, you decide to withdraw £5,000 from your ISA, leaving your invested balance at £5,000, but your tax allowance is still at £10,000.

You invest further £8,000 funds back into your stocks and shares ISA, meaning you now have a balance of £13,000 but you can now only invest a further £2,000 to reach your maximum yearly £20,000 allowance.

Withdrawing and investing in your ISA.

Your ability to withdraw and replace funds depends on the type of ISA you have. A Cash ISA is the most flexible way of saving in an ISA, you can withdraw and invest funds whenever you wish. When investing in an ISA, please bear-in-mind that you cannot roll over your tax allowance into a new tax year. The new ISA allowance will simply reset to the annual limit again at the start of the next financial tax year.

How can Hilltop Finance help?

Our team of financial advisers are experts in ISA investments, and following our assessment on your current ISAs we can make a recommendation to ensure your money is in the right ISA for you.

If you’d like to learn more about our ISA assessment service, please click here or call 0161 413 7051.

Capital at Risk. The value of your investments can go down as well as up.