What are ISAs?

Putting money aside for the future is a wise move. Growing it is even better.

Individual Savings Accounts (ISAs)

ISAs are a way the UK government encourages people to save or invest for their future. You can save or invest up to £20,000 in a combination of different ISAs and any interest or growth is not subject to Income Tax or Capital Gains Tax.

Find out more about some of the different types of ISA available below.

Stocks and Shares ISAs

Investing in stocks and shares means your money could benefit from how these companies perform and increase in value. It comes with the risk that the value of your investments can reduce too.

When you invest in a stocks and shares ISA you should carefully consider not only the potential losses and gains, but also the fees and charges. Stocks and shares ISAs often come with several different types of charges, including Annual Management Charges, platform charges, charges for transferring between accounts and other fund costs.

Stocks and shares ISAs will tend to invest in an investment fund. The choice is huge and funds come with different mixes of investments. One of the most important things to consider is the trade-off between risk and reward - typically the more risk you take, the higher the potential rewards. You can get low risk funds that will invest in cash and other fixed interest investments, and others that will invest 100% in company shares. The latter will be more risky. The choice is yours as to how much risk you are comfortable taking with your money.

Lifetime ISAs

The Lifetime ISA is designed to help people buy a first home or save for retirement. It’s available in both cash and stocks and shares versions.

Anyone aged 18-39 can open one up, put in up to £4,000 per year and receive a 25% bonus from the government. That’s up to £1,000 for free. Every year, up to the age of 50. While the Lifetime ISA has its own payment limit of £4,000 per year, any payments into the LIfetime ISA are subject to the overarching £20,000 ISA subscription limit mentioned at the top of this article.

The OneFamily Lifetime ISA is invested in stocks and shares rather than saved in cash, because we believe this presents the best opportunity for growth over the longer term.

If you don’t use your Lifetime ISA for a deposit on a first home or for retirement the withdrawal is subject for a penalty of up to 20% (25% after 5th April 2021), which can mean you can get back less than you put in.

Cash ISAs

Cash ISAs work similarly to bank deposit accounts. Any interest you earn on your cash ISA savings is free from Income Tax.

The downsides of saving in cash is that Cash ISAs have offered quite low interest rates in recent years, reducing the likelihood that your savings can beat the rate of inflation. That’s why some people think it’s better to invest your money in stocks and shares.

There is also the issue of inflation. If the cash ISA interest rate is lower than the rate of inflation, then the spending power of the money is actually reducing over time (in 'real terms').

Are ISAs still worth it? We certainly think so

Cash ISAs are a tax-free alternative to traditional bank accounts and can be useful for short term savings goals.

If you’re working towards a medium or long-term savings goal, stocks and shares ISAs are a useful way to get there.

If you’re saving for a first home or for retirement and you can save £4,000 per year you could benefit from a £1,000 annual government bonus with a Lifetime ISA.

Any ISA invested in stocks and shares is subject to stock market fluctuations, so while the aim is to grow your money it is possible to end up with less than you started with.

Important information

You can only pay into one cash ISA, one stocks and shares ISA and one Lifetime ISA each tax year.

All the ISAs listed here are covered by the Financial Services Compensation Scheme, which means if the savings or investment provider fails you will automatically be compensated up to £85,000. Find out more.

You can find further information on all the different types of ISA available at gov.uk.

Please note: OneFamily do not provide investment advice. You should always remember when dealing with stocks and shares, whilst they can have good potential for returns in the long run – their values can fall as well as rise. So, there’s always a chance you could get back less than is paid in.