Which ISA is Best for You?

If you are wondering which ISA to choose, you are in luck.

Tax-efficient investors and savers have never had so many options.

Whether you are a wannabe trader, a prospective home-owner, a responsible parent, or a pension saver, there is an ISA product that is perfectly suited to your needs.

The only problem is that you’ll have to sift through a variety of different products first.

Choosing the right ISA can be a long and difficult process, so we’ve taken the guesswork out of it!

Read on to find out which ISA is best for you, no matter what type of saver you are…

For long-term (ten years plus) investing… Stocks and Shares ISA with a focus on equities

Long Term Investing

As a long-term investment option, the stock market is hard to beat.

Over time, the market will always outpace the rate of inflation, even if there are a few dips along the way.

However, this strategy relies on the construction of a balanced portfolio with a focus on blue chip equities (FTSE 250 or S&P 500 companies) supported by some bond holdings and cash reserves.

If you plan to invest in the stock market for ten years or more, work out your individual risk profile and aim to build a balanced portfolio around this. Then resist the temptation to sell when the market goes down, and buy when it goes up.

For big returns… Innovative Finance ISA

Innovative Finance ISS

The Innovative Finance ISA (IFISA) is the newest ISA product on the market, but it is already proving to be hugely popular with income-seeking investors.

But while some IFISAs are offering returns of up to 16 per cent, but they are not without risk.

When you put your money in an IFISA, you are investing in peer-to-peer lending and the crowdfunding sector, which is still in its infancy in the UK.

P2P providers will offer a fixed rate of interest to lenders, which is free from taxation if you lend via an IFISA. This money is then loaned out to a range of vetted borrowers, who must pay it back via the platform.

If these borrowers default on their repayments, you (the lender) could end up with nothing.

While this is a substantial risk, it is worth noting that this has never actually happened to any UK P2P lender.

For the lowest possible risk… Cash ISA

cash isa for safety

Investing in a Cash ISA is not going to net big returns, but this is the only ISA product which is protected under the Financial Services Compensation Scheme (FSCS), which means that your deposits are guaranteed up to the value of £85,000.

For many savers, this level of security makes up for the low interest rates being offered by most Cash ISA accounts.

According to the most recent Bank of England data, in March 2018, the average Cash ISA was paying just 0.86 per cent, while Consumer Price Inflation (CPI) was 2.7 per cent.

For a child’s inheritance… Junior ISA

Junior ISA

There are a lot of taxation issues surrounding inheritance (not least the Inheritance Tax bill itself), but by investing in a Junior ISA you can save for your child’s future without having to worry about the lingering threat of over-taxation.

Like other ISAs, a Junior ISA – or JISA – allows parents to open a tax-free savings account in the name of a child. The annual allowance is much lower than other ISAs – just £4,620 per year – but the interest rates are usually much better than those being offered for Cash ISAs.

When the child turns 16, they can take control of the account, although they aren’t allowed to make any withdrawals until they are 18.

For active investors… Stocks and Shares ISA

stocks shares isa

The beauty of a Stocks and Shares ISA is that it can be whatever you want it to be.

Conservative investors can stick with a low-risk portfolio of bonds, cash and fixed income products, while aggressive investors can take more risks with private equity plays, hedge fund investments and emerging markets allocations.

If you enjoy playing the markets on a daily basis, a Stocks and Shares ISA will ensure that you can keep any big returns that you make, and these tax-free savings should go some way towards offsetting any transaction fees.

For pension savings… Lifetime ISA

lifetime isa

If you are saving towards a pension, the Lifetime ISA – or LISA – is one of the best possible choices. If you qualify. It is only available to savers under the age of 40, and you can only invest up to £4,000 per year.

The government will then top up any investments by 25 per cent, meaning that LISA savers could receive up to £1,000 in free money every year.

However, there are a few caveats. You can only use the money to either save for your pension or pay for a deposit on your first home. And on your 50th birthday, you can no longer add money into the account.

For new investors… Flexible ISA (instant access)

flexible isa

One of the most common issues that new investors have is trying to work out how much they can afford to put aside every month. It’s easy to over-estimate your investment budget, particularly once you are faced with unexpected expenses.

So during your first year of ISA investing, make sure you choose an instant-access Flexible ISA which allows you to withdraw money whenever you need it.

A Flexible ISA will ensure that any withdrawals made won’t impact on your ISA allowance for the rest of the year – for instance, if you have saved £20,000 and withdraw £5,000, you will still  be able to invest that £5,000 back into your Flexible ISA before the end of the tax year.

In non-flexible ISAs, that £5,000 withdrawal would effectively reduce your annual allowance to £15,000.

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.