The Different Types of ISA Accounts and How They Work

You may know the basics of Individual Savings Accounts (ISAs), such as the fact that they’re used to shelter savings and investments from the various taxes that they would otherwise be subject to.

But do you know of the different types of ISA accounts now available to you in 2017?

The range of ISAs available has changed, and their rules is a source of confusion for many. Read on to find out what you need to know about each type of ISA to see which is right for you.

Types of ISA Account

While a basic account may be the well suited to the majority, your personal requirements may well differ from the rest. It is therefore important to save with the right accounts, lest your hard-saved cash not go quite as far as you’d like it to. Let’s take a look in more detail.

Cash ISA

The most popular, and often the first ISA anyone opens is the common-or-garden option. The cash ISA allows you to save up to £20,000 in savings, with no respective income or capital gains tax paid on the interest.

This is a great option for any first ISA and a pretty reliable one for anyone to store accessible funds. Depending on your provider, you may be able to access your money instantly (in the Flexible variants) or squirrel it away more securely with a fixed-term account.

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Junior ISA

A Junior ISA is for parents who wish to save up for their kids, with the same advantages of its cash ISA counterpart but often with very competitive rates.

However, no more that £4,128 can be paid in per year. When you child turns 16, they get control of the account (don’t worry – they can’t withdraw for another two years), and it will change to a cash ISA when they turn 18.

These can also be opened as a stocks and shares account, utilising compound growth over the long term by investing in income or equity growth funds. The risk of these investments will be reduced if investing for the long term, to ride out a stock market downturn.

These accounts can usually be opened from as little as £10/month, but the terms and conditions vary.

Innovative Finance ISA

For those who have encountered peer-to-peer loans or crowdfunding, the IFISA is the government’s recognition of these new money-raising methods.

Many of the companies providing p2p investments are now being approved for these regulated accounts which have tax-free status.

With current interest rates being low, the IFISA can be an alternative to receive better returns than cash ISAs from a bank. It is worth mentioning that funds in a IFISA are not covered by FSCS, and it is considered higher risk than a cash ISA.

Note that you cannot transfer existing funds made through P2P methods into the account. However, you can transfer funds from other ISAs.

Inheritance ISA

This one is aimed at those who have lost their ISA-holding spouses or civil partners, and it allows for a tax-free transfer of the deceased’s funds into the partner’s own ISA allowance, should their will allow for it.

This account must be opened within three years of the death, although more time may be allowed if the estate is still being administered at this point.

Help to Buy ISA

Designed to help people get onto the increasingly slippery first rung of the property ladder, the Help to Buy ISA allows people to save up to £200 per month (£1,200 in the first month) and gain a 25% bonus from the government up to a maximum of £3,000.

The catch here is that the money must only be used for a deposit – the government will pay upon completion of the purchase.

Help to buy ISAs will be available to open until 2019 and may be the right option for you if you are currently 16 or are looking to buy soon.

Lifetime ISA

A brand new one for April 2017 here: the Lifetime ISA enables the saving of up to £4,000 per year, with a government bonus of 25%.

It will take some time for the accounts to be released with the best rates, although their are stocks and share accounts which are an option for the long term.

Another account that aims to assist in the precarious position of young people, it will allow young people to save specifically not only for a home but for a retirement income.

Money can only be withdrawn for a house deposit if a first time buyer, and the property is under £450,000, or after the account holder has turned 60.

The money can be used as the account holder sees fit in retirement, and there is no tax on any cash that is withdrawn.

This ISA is not truly a direct replacement for a pension, but may be a useful addition depending on your situation and other retirement savings.

Stocks and Shares ISA

For those wanting to grow their money over the long term, then a stocks and shares ISA is worth looking into. With some you choose investments yourself and others work as a kind of robo-advisor, with less choice.

If you’re just starting out in the world of investment funds, a tracker fund can make a good first choice. These funds follow the movement of an index of the stock market – for instance, the FTSE 100. So if the index rises, then your tracker fund rises respectively – and if it falls, so too will your tracker fund and what your investment is worth.

The account providers usually make money with the fees they charge to operate their systems, so it is worth comparing options depending on how you’d use the account.

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Naomi Gould
Last updated: December 7th, 2017
London Capital & Finance - 3 Year Fixed ISA
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