ISAs – What’s Right For You?

ISAs are a popular tax-free saving product. In recent years they’ve been revamped and there are now a few types to choose from with different options, limits and benefits. Are you investing in the right one for you?
ISA advantages

There are four kinds of ISA you can invest in: cash; stocks and shares; innovative finance; and Lifetime (LISAs). You can invest across ISA types up to the overall limit of £20,000 per tax year. There’s also a Junior ISA which has its own annual investment limit. If you don’t invest up to the maximum you can’t carry the unused limit forward. However, conditions limit which type of ISA you can choose.
Age and residency conditions

You must be at least 16 to open a cash ISA. For stocks and shares or innovative finance ISAs, you must be over 18. LISAs have three age thresholds: you must be over 18 but under 40 to open an account, and you can save in it until you’re 50. Income (interest etc.) received on all ISAs is tax free and for LISAs there’s an extra incentive.

You must be resident in the UK to invest in an ISA. If you start one and move abroad, you can’t carry on investing after the tax year you move but you can keep the ISA open, and you’ll still receive UK tax relief on money and investments in it.

The rules for LISAs are different. They’re designed to help you save for a first home or for when you reach 60. You can save up to £4,000 in a LISA each year until you’re 50. The government adds a 25% tax-free bonus for each £1 you save up to a maximum of £1,000 each year until then.

Trap. If you withdraw funds before you’re 60, unless it’s to go towards buying your first home the government will claw back the bonuses.
Junior ISAs

While you’re not allowed to have a joint ISA with someone else, you can hold a Junior ISA in your name for a child under 18. The savings limit for a Junior ISA in 2018/19 is £4,260.

Tip. If you’ve used your ISA limits, a Junior ISA is a way to save for, say, higher education fees.

As a parent or guardian you can open the ISA and manage the account, but the money belongs to the child. They take control at 16 but can’t withdraw the money until they reach 18.

Tip. You could use LISAs to help older children, too. If they’re in the right age range and looking to buy a home, think about giving them funds to invest in a LISA.

Inheriting ISAs. While ISAs count as part of your estate for inheritance tax purposes, they are exempt if you leave them to spouse/civil partner. What’s more, your partner might be entitled to keep the income tax advantages.

Anyone 16 or over can invest up to £20,000 each year in a cash ISA. It’s 18 or over for an alternative finance or stocks and shares ISA. You must be under 40 to open a Lifetime ISA, but you can invest in it until you reach 50. Remember, you can’t carry your ISA limits forward, so use them each year if possible.

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