2) Make the most of your ISA options
Recent changes mean that you now have more options when using your ISA allowance.
There are three types of ISA:
cash (including easy access, fixed rate, Help to Buy and – from 6 April 2017, if you’re aged 18-40 – Lifetime)
Stocks & Shares (which can also be invested in as part of a Lifetime ISA)
Innovative Finance (when you lend your money to other individuals or companies as a loan).
In the 2017-18 tax year you can have a Cash, Stocks & Shares, Innovative Finance and Lifetime ISA. However, there are a few limitations:
- a maximum of £4,000 can be in the Lifetime ISA
- some providers may allow you only to have a Cash ISA or Help to Buy ISA – not both
- during the 2017-18 tax year, if you open a Help to Buy ISA you can transfer this to a Lifetime ISA, but the transfer will be included in your allowance for this tax year
- some Lifetime ISA products will be offering Cash and Stocks & Shares ISA facilities in a single product.
You can transfer your money between the different types of ISAs – but remember, you can only subscribe to one Cash ISA, one Stocks and Shares ISA, one Innovative Finance ISA and (if eligible, and from 2017-18) one Lifetime ISA in each tax year, up to the combined annual limit.
There is also a cap of £4,000 on Lifetime ISA subscriptions (on which you will receive a Government bonus of 25% – see HM Treasury’s Lifetime ISA factsheet for more information). With a Help to Buy ISA you can invest up to £1,200 in the first month and £200 a month thereafter, giving a total of £3,400 in the first year; the Government will boost your savings by 25% – see HM Treasury’s Help to Buy ISA factsheet for more information.
Choosing what is best for you depends on your personal circumstances. You may wish to seek advice from an independent financial adviser.
A Cash ISA gives you tax-free returns that are not susceptible to stock market fluctuations
Cash ISAs: if you want the assurance of tax-free returns that are not susceptible to stock market fluctuations, a Cash ISA may be best for you. There are two types of Cash ISA to choose from:
Easy access – you are often allowed unlimited withdrawals (handy if you need frequent access to your savings). Some products may offer a higher rate but only allow a limited number of withdrawals per year before the rate reduces, so these may be ideal if you need only occasional access.
Fixed rate – you are usually only allowed withdrawals subject to a charge equivalent to a loss of interest. Interest rates are typically higher on these accounts and you have the security of knowing your interest rate is fixed for a given period (usually 1-5 years).
If you’re prepared to save for longer and are willing to accept an element of risk in exchange for potentially higher returns, you could consider a Stocks & Shares ISA.
Stocks & Shares ISAs are a tax-efficient way to invest in the stock market and can help protect you from tax on interest, dividends and capital gains.
Stocks & Shares ISAs are a tax-efficient way to invest in the stock market and can help protect you from tax on interest, dividends and capital gains
Although there’s always an element of risk involved, and you may get back less than you invest, investing gives you the potential to beat savings rates, meaning that over the long term you could grow your money more. Stock market fluctuations can take time to iron out, so as a general rule, you should be prepared to invest your money for at least five years.
With a Stocks & Shares ISA you can invest in a variety of funds and asset types, such as bonds, gilts, UK and overseas shares, allowing you to choose what meets your needs.
A Stocks & Shares ISA is a medium to long term investment so you should be prepared to invest your money for at least five years. Tax depends on your individual circumstances and may change in future.
Help to Buy ISAs: a Help to Buy ISA is a great way to save for your first home. As well as earning tax-free interest as you save, the government will give you a £50 bonus every time you put away £200, up to a maximum bonus of £3,000, payable when your house purchase completes.
You can save £1,200 in the first calendar month and £200 in every subsequent month.
If you’re saving for your first home with another first time buyer, you can both open a Help to Buy ISA.
When you buy your first home, the government pays the bonus you’ve earned to your solicitor or qualified conveyancer, who’ll use it to complete your house purchase.
You cannot save into both a Help to Buy ISA and a Cash ISA in the same tax year – you must choose between them.