Individual Savings Accounts, which are also called ISA, are a whole new way to save or invest money. Nowadays, an ISA is the most popular savings account because it allows the account holder to save or invest money without paying any tax on it. This new kind of account can be very convenient for some categories of people: for examples, all UK residents over 16 can have their own account. There’s even a special type of ISA that can be opened by a parent or by a legal guardian for their underage children. Whatever type of ISA a person decides to open, all money will be protected from tax, even withdrawing from ISA is tax-free. This new type of account, which is growing in popularity, comes with a restriction on the amount of money the account holder can deposit or withdraw in one year. This value is called “annual ISA allowance” and it currently amounts to £20,000 per year. For a better comprehension of this matter and to fully understand which ISA is best for each particular category of people, we made a list of all the types of Individual Savings Account available.
Different types of ISAs
Given that nowadays the ISA is the most popular way to save or invest money in the UK, there are obviously many different types of accounts one can open according to one's needs. The four main categories of ISAs are called Cash ISA, Stock and Shares ISA, Lifetime ISA, Innovative Finance ISA and Junior ISA. Let's have a look at the main differences between the various types of accounts.
A Cash ISA is very similar to a regular savings account, except that it allows the account holder to make contributions without paying any tax and the need to comply with the annual ISA allowance of £20,000 per year. Cash ISA is advisable for youngster or for whoever has short-term goals as it allows to withdraw money any time you want as you can have instantly access to your money. However, there are also fixed-term Cash ISAs that generally offer higher interest rate but money need to stay “locked” for a longer period.
Stocks and Shares ISA
A Stock and Shares ISA is a particular account specifically created for investments. By opening this kind of account, the account holder won’t just be saving money, but he will be able to invest in stocks and shares, properties, bonds, etc. This will help the savings grow over time without paying any tax. Of course, like any other kind of investment, by investing money with a Stock and Shares ISA the money is at risk, so it requires more attention perhaps relying on the help of professionals.
Lifetime ISA is a new type of Individual Saving Account designed to help people save money to buy their first house, or set up a retirement plan. To open a Lifetime ISA, the account holder must be 18 to 40 years old, and he’ll be able to deposit money and the government will add the 25% of your deposits up to £4,000.
Innovative Finance ISA
Innovative Finance ISA is a kind of account that lets the account holder invest money in peer-to-peer lending. This way, the person who owns the account will be able to lend money and get it back with interests. However, even if this kind of investment provides higher rates of interest, it’s riskier as your earnings may be subjected to an increase but also to a decrease.
Junior ISAs are long-term, tax-free savings accounts designed for children who withdraw money when they are 18. These accounts can also be Cash ISA, designed to save money, or Stock and Shares, to help the savings grow overtime without paying any tax. For Junior ISAs the annual allowance is fixed £4,368 per tax year.
What are the benefits of an ISA?
As previously mentioned, all ISAs are specifically designed to be tax-free and, in most cases, to help the savings grow overtime. This represents of course one of the main reasons for the great success of this new way of saving or investing, which is available in a diversified supply to meet the needs of more and more people.
The money the account holder will deposit on his ISA will grow tax-free. Also, the annual allowance, which amounts to £20,000 per year, will start over at the beginning of a new tax year.
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