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There are a lot of options when choosing the right ISA, PAF Hereford can help.

There are a lot of options when choosing the right ISA, PAF Hereford can help.

What is an ISA?

An ISA is an Individual Savings Account. There are different types of ISA to help you save or invest, depending on your goals. The four main types are Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs.

If you’re a UK resident over 16, you can have a Cash ISA. From age 18 you can also have a Stocks and Shares ISA, Lifetime ISA (if opened under 40) and Innovative Finance ISA.

It’s also possible for a parent or legal guardian to open an ISA for a child under 18. If they’re 16 or over, the child can open one themselves. 
The two main benefits of ISAs is that they’re free from UK tax and you can withdraw money whenever you need to.

Please note: Tax rules for ISAs can change and their benefits depend on your circumstances.

ISA Allowance

Each tax year (6 April to 5 April), there’s a maximum amount of money you can put in ISAs, called the ISA allowance.

These allowances are reviewed every tax year and are subject to change.

The ISA allowance is only for the money that you put into ISAs each year. It doesn’t include the total amount that’s in your ISAs from previous tax years, or the money you earn from investments in your ISA.

How many ISAs can I have?

You can have any number of ISAs. But you can only pay into one of each type each tax year. You just need to make sure the money you put in across all your ISAs each year doesn’t go over the total ISA allowance.

Details On ISA's

Lifetime ISAs were created to give you a boost towards buying your first property. If you’re aged between 18 and 39 years old, you can put in up to £4,000 into a Lifetime ISA and the government will add an extra 25%, up to £1,000 a year. All money in your Lifetime ISA is free from UK tax, so it’s a great boost to your savings.

Tax rules can change and their benefits depend on your circumstances. Lifetime ISA allowance forms part of the overall £20,000 annual allowance.

After 12 months from the first payment, you can use the money to make an eligible house purchase for a property worth up to £450,000. Or you can wait until you’re 60 and take your money out then.

If you want to take money out before you’re 60 and you aren’t buying your first home, there’s usually a 25% government charge (20% if the withdrawal is made between 6 March 2020 and 5 April 2021). That means you could get back less than you originally put in.

There are strict rules about when you can take money out of a Lifetime ISA without paying a government withdrawal charge. You can withdraw your money if you’re buying your first home (with a purchase price of up to £450,000). You also have the option of leaving the money in your Lifetime ISA and withdrawing it from age 60.

In most other cases, if you want to withdraw your money you will pay the government withdrawal charge of 25% of the amount withdrawn, so you could get back less than you put in.

Cash ISAs are one way of saving for the future, and the interest they generate can provide additional income too. However, the interest rates banks are offering are currently so low that interest often doesn’t even keep up with the rate of inflation.

How inflation erodes your buying power

Average Inflation

What £1,000 will be worth in real terms

5 Years£884£784£697£621
20 Years£610£377£235£149
40 Years£372£142£55£22

If inflation is higher than the interest rate on your cash savings, prices are increasing faster than your money is growing. This means that the real value of your savings falls over time. With this in mind, it’s no surprise people are looking for alternatives.

An alternative to keeping money in a cash account is to invest. Over time, stock markets have consistently delivered better returns than cash accounts.

Past performance is not a guide to future returns, and stock market investments can go down in value as well as up. If you invest in the stock market you could get back less than you put in.

All ISAs allow you to save and invest without paying UK income or capital gains tax.
While most savers also won’t pay tax on interest in regular bank or building society savings accounts, if you have a sizeable savings pot, ISAs could potentially save you quite a lot in tax.

Tax rules can change and benefits depend on individual circumstances.

You can move your ISAs to a new provider as often as you like, and whenever you want.

The best part is, transferring doesn’t count towards your ISA allowance (although if transferring to a Lifetime ISA it may count towards your Lifetime ISA allowance).

Transferring between types of ISA
You can also move between types of ISA, for example if you’d like to transfer your Cash ISA to a Stocks and Shares ISA, it may also be possible to transfer part of your ISA. Just remember that if you have a fixed rate Cash ISA and you transfer it before the fixed term ends, you may have to pay a penalty.

Although most accounts for children must be opened by a parent or legal guardian, there are exceptions.

Grandparents are often keen to contribute to grandchildren’s savings as a way of rolling wealth down the generations and saving tax.

Cash may seem like the safest option with guaranteed returns but there is a risk that interest will not keep up with inflation. A child will not lose money, but they may be able to buy less with the fund in future than they could today.

Stock market investments have historically outperformed cash over the long term but are riskier – they will fall as well as rise in value and a child could get back less than invested. Past performance should not be seen as a guide to how investments might perform in future.

When money or assets are paid into an account for someone else’s benefit (such as a child’s), this is treated as a gift. Some gifts are (or may become) free or exempt from inheritance tax, others may be subject to it. Remember tax rules can change over time, and the value of benefits will depend on the child’s circumstances.

The main aim of investing for a child is usually to provide a nest egg to help them out financially in later life. However, there are additional benefits that could see the amount of tax needing to be paid both now and in future reduce significantly.

The simplest way to minimise tax is to use a tax-efficient account such as a Junior ISA or child’s pension such as the Junior SIPP. As the investments are held in the name of the child, no tax liability falls on parents either.

As with all things tax, the rules are likely to change over time. The benefits will depend on the individual circumstances of the child and the person paying into the child’s account.

Investments outside a Junior ISA or SIPP are liable for tax. One solution is a legal arrangement called a bare trust.

The investments are not held in the name of the child, but are taxed as if they belong to them – it is therefore necessary to consider the tax position of the child and also the person who is adding money to the account (the donor).

The Financial Conduct Authority does not regulate Tax and Trust Planning.

ISAs allow you to shelter your money from the taxman and there are a number of ways you can do this.

Need advice on ISA's?

With over 40 years experience PAF Hereford can help make an informed decision.  

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The value of your investment can fall as well as rise and is not guaranteed.

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