ISAs 101: Everything You Should Know About Individual Savings Account

During the last few years, UK residents have earned a wide range of options to save or to invest money. Today, among the most popular options there are ISAs, namely Individual Savings Accounts, purposely aimed at put savings aside or starting investing.

That’s why an ISA is somewhere between an investment account and a savings account which has some specific rules and tax benefits. In fact, ISAs have been designed to help you manage your money in a tax-efficient way. It doesn’t matter if you want to save or invest your money, it will always be protected from UK taxes.

That’s one of the main reasons for the great popularity of ISAs among new investors who want to undertake a new economic path. Nonetheless, even though this kind of account may be appealing for investors, you should always take into consideration the risk that comes with it.

As a matter of fact, any kind of investment involves risk and can lead to potential losses. Being the outcome of every investment unpredictable, you could always end up getting less than what you invested. However, if you’re planning to start investing your savings, you should gather as much information as possible about the options available. Therefore, let’s have a closer look at how ISAs work.

How do ISAs work?

Individual Savings Accounts come in several different forms. Either account you’ll choose to get, as stated above, you will always be able to save and invest money in a tax-efficient way. Also, you’ll be required to comply with the Annual ISA Allowance, which refers to the amount that can be put on an ISA in a tax year. This value is set at £20,000 for most types of ISAs. However, some ISAs are flexible, that’s to say, they give the holder the possibility to withdraw from the account and pay it back within the same tax year without affecting the annual allowance. If you want to find out more about the matter, check this article: https://blog.moneyfarm.com/en/isas/is-your-isa-flexible/.

All the ISAs you can choose between

When it comes to Individual Savings accounts, you should know that there are different types. First of all, there’s Cash ISA, which is the closest you can get to a regular savings account. The only difference stands in the chance to save in a tax-efficient way. Stocks and Shares ISA, on the other hand, works in a similar way to a regular investment account. You’ll be able to invest your savings in a wide range of assets, such as stocks, bonds and more without – once again – ever paying any tax on it if you comply with your allowance. Lifetime ISA is an account which let the holder invest money for life-related purchases, such as the first house or for retirement. On the other hand, Innovative Finance ISA offers the holder the opportunity to use peer-to-peer lending with the aim of getting tax-free interest back. It is a high-risk product since there is no guarantee if the borrower defaults. Lastly, there is Junior ISA, which is a special account designed for saving for underage children. Let’s go deeper into this matter.

An ISA for children

Junior ISAs give you the chance to save or invest your savings for underage children. This type of fund is intended for parents or legal guardians who want to save money for their children, who will be given access to their capital as soon as they come of age. At the age of 18 they will in fact be able to withdraw the money you saved for them.

Junior ISAs come in two different types: as a matter of fact, when you decide to open one you can choose whether to save or start investing the money you put on the trust. The first type is called Cash Junior ISA, and just like a regular Cash ISA, it is similar to a regular savings account.

The Stocks and Shares Junior ISA will let you invest in a great variety of fields according to your preferences. Remember that when you invest money you could always end up getting less than expected, for all investments are risky and subject to market volatility. The annual allowance for a Junior ISA is set at £9,000 per year, and other family members and friends can give their contribution as well.

Differences between ISA and GIA

Many first-time investors often question themselves about the differences between ISAs and GIAs.

These are two really different accounts whose aims and characteristics differ for some reason. As mentioned above, an ISA is a tax-free Individual Savings Account meant to let you save or invest in a great variety of fields. On the other hand, a GIA is a General Investment Account intended just for investments which can be opened by any British citizen over the age of 18. By opening one, you’ll be able to choose the investment areas according to your preferences without any limit on the amount of money that can be deposited or invested.

In fact, with a GIA you won’t have to comply with any annual allowance. However, this kind of account does not grant you a tax benefit. As a matter of fact, investing in a GIA requires you to pay contributions according to your tax situation. Which account may be suited for you then? The choice is only up to you and will solely depend on what you intend to do with your money. For instance, if your goal is to put money aside for your family or for your children, ISAs may be the right choice for you. On the other hand, if you want to start investing without any kind of restriction on the amount, a GIA may be a valuable option to consider.