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What are ISAs?

ISA stands for Individual Savings Account. ISAs are simply a type of savings account that people can use to hopefully grow their money either by earning interest or by it being invested in the stock market on their behalf. 

The main reason people choose an ISA other other types of savings account is that they are tax-exempt. That means when you save money in an ISA, you don't need to pay tax on the money you take out, no matter how much it's grown.

Because of this, the government limits how much people can pay into ISAs. At the moment, you can save up to £20,000 each tax year in ISAs, but this is reviewed every year so could go up or down.

There are different types of ISA to suit different needs: cash, stocks and shares, lifetime and innovative finance.

Cash ISAs

Cash ISAs are a lot like ordinary savings accounts. The money you pay into the account earns interest and you tend to know the percentage it will grow by when you open the account. The more money you pay in, the more interest you'll make.

Unfortunately, interest rates on cash ISAs can be fairly low, so you might find other types of savings accounts offer higher interest rates.

Not everyone needs to pay tax on their savings and, if that's you, your money might grow more in a different type of savings account and you'd still not pay any tax. It's worth checking if you need to pay tax on your savings which you can do here.

Stocks and shares ISAs

Stocks and shares ISAs invest your money in funds which buy company shares. You earn returns, rather than interest, depending on how much those companies grow.

Stocks and shares ISAs therefore tend to offer greater potential for growing your money over the long term - five years or more. But when you invest there is always the risk that the value of your investment can go down as well as up. Some stocks and shares ISAs will include cash and fixed interest investments to reduce the risk of that happening.

Lifetime ISAs

When you save with a lifetime ISA, the government tops up the money you save by an extra 25%, as long as you use it to buy your first home or withdraw it after you turn 60.

If you take money out for anything else, the government charges you a withdrawal fee, which is a good incentive not to dip into your savings but does mean you need to be sure of what you're saving for!

You can put up to £4,000 each year into a lifetime ISA and get up to £1,000 a year from the government.

Lifetime ISAs come in cash and stocks and shares versions.

Innovative finance ISAs

Innovative Finance ISAs are a type of peer-to-peer lending. You lend your savings to borrowers in return for a pre-agreed amount of interest, which is higher the longer you keep your money invested.

How ISAs can help you save for your future

Find out more about how ISAs work in this short video

ISA fees and charges

When you invest in a stocks and shares ISA you should carefully consider not only the potential losses and gains, but also any 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. You'll be able to check what these are with the ISA provider.

At OneFamily, we keep things simple with just one annual management charge of 1.1% of the ISA value, for both our Stocks and Shares ISA and our Lifetime ISA.

Risk and reward

Some stocks and shares ISAs will invest your money in an investment fund, that helps diversify your investment. 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 choice is yours as to how much risk you are comfortable taking with your money.

Are ISAs worth it?

It depends!

If it's possible that you'll need to pay tax on the money your savings make, putting money in an ISA could bring your tax bill down.

You might also make money on your savings by choosing an ISA.

With a cash ISA your returns are guaranteed because you'll get a set interest rate. There's also no risk of you losing money as the amount in your ISA can't go down (except when you withdraw money). However, if that interest rate is lower than inflation, you might find you can afford less with the money in your ISA when you come to withdraw it.

Stocks and shares ISAs have potential to make more money than cash ISAs. Your money is invested in the stock market so there are no guarantees of how much you'll make (or that you'll make any money at all) but there's no limit to how much your savings can grow. In fact, in every 5-year period between 2000 and 2021, stocks and shares have out-grown interest rates*.

Important information

Cash ISAs, lifetime ISAs and tocks and shares ISAs 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.

Got a Child Trust Fund or Junior ISA with OneFamily?

You can easily transfer a matured Child Trust Fund or Junior ISA into our Lifetime ISA or Stocks and Shares ISA. Log into your online account once you've turned 18 to get started.

Find out more about investing in our Stocks and Shares ISA or Lifetime ISA.

Find out more about reinvesting your Child Trust Fund or Junior ISA

Please note: OneFamily does 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.

*Source: Barclays GILT study 2023.

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