What are my ISA options? A guide to the main types of ISA

An ISA, or Individual Savings Account, is a tax-efficient savings plan. Choosing the right ISA for you can be difficult. Your ISA options include cash, stocks and shares, innovative finance, or lifetime, but what are the differences between them and what do you need to consider?  

Once you have chosen as ISA type, you then have further options to tailor your savings or investments to you. If you choose a cash ISA, you can decide between a variable or fixed interest rate. If you choose an investment ISA, you can opt for full control over your investment decisions or invest into a ready-made portfolio.  

If you’re not sure which type of ISA is the best choice for you, we’ll look at the key features of each one to help you make an informed decision.   

How many ISA options are there?

There are four main types of ISA available:  

• Stocks and shares ISA 

• Cash ISA 

• Innovative finance ISA 

• Lifetime ISA 

These ISAs all work in different ways, and each carry certain benefits and risks.  

What are the differences between each type of ISA?

The types of ISAs differ in various ways, so it’s important to understand how they both work to decide which is the best option for you. 

• A cash ISA is like a savings account, where your money earns a rate of interest decided by the account provider. The key difference from a standard savings account is that you don’t pay income tax or capital gains tax on the interest your ISA makes. Whereas with a standard bank or building society savings account, you may have to pay tax depending on how much interest you earn. 

• A stocks and shares ISA is a tax-efficient investment account, where your money is invested in the stock markets with the aim to make returns. You’ll pay no income tax if you sell an investment that grows in value, or on dividends (which are profits distributed to shareholders). A stocks and shares ISA gives your money more potential for growth than a cash-based savings account. However, stock market investments can go down as well as up, so this account comes with some risk. 

• An innovative finance ISA (IFISA) allows you to invest in peer-to-peer lending. You’ll be matched up with borrowers, which could be businesses, individuals, or property developers. Your money will be tied up for an agreed amount of time, after which they will pay back the borrowed amount plus interest. 

• A Lifetime ISA (LISA) is designed to help people save up for their first home or retirement. You can save up to £4,000 each tax year, and the government will add a 25% bonus. You must be between 18 and 39 to open a LISA, but if you’ve already got one you can pay into it until you reach 50. You will still earn the 25% government bonus on what you save before 30. When opening a LISA, you can choose between a cash LISA, where you can earn interest on the money you add, or a stocks and shares LISA that earns you money through investment growth. 

Stocks and shares ISA options

With a stocks and shares ISA, you put money into a range of investments that can grow in value or pay dividends. These investments might be individual stocks and shares, bonds (a loan to a company or a government) or a fund (a collection of stocks, shares and other assets collected into one investment).  

Due to the range of potential investments, a stocks and shares ISA can come with various options depending on where you wish to invest your money.  

What is an actively managed stocks and shares ISA?

When you open an ISA, your money is spread across a variety of different investments. These can come in the form of an actively managed ISA with investments selected by experts, or you can choose a passively managed ISA where shares aren’t actively bought and sold to outperform the market – instead fund managers usually track a market index so decisions are made automatically. 

Both passively and actively managed ISAs, such as our stocks and shares ISA usually spread your money across a variety of stocks and shares, equities, bonds, and property. 

You can also choose which shares to hold yourself with a self-select ISA. However, you should be aware that you could potentially expose yourself to an increased level of risk as your investments are more likely to be concentrated in a smaller number of companies. Additionally, you’ll be solely responsible for managing your own investments, which can be both complex and time-consuming, so if you don’t have the expertise or time to manage this, it might not be the best option for you. 

Learn about how your money is invested in our Investment ISA video.

View video transcript

When you invest in a Shepherds Friendly Investment ISA, your money is placed into a ready-made With-Profits fund. Similar to other types of investment funds, a With-Profits fund spreads your investment across a range of assets, such as cash, equities, and bonds. Additionally, our expert Fund Managers actively manage the fund, adjusting the allocation between different types of assets to help reduce volatility and give you the best opportunity to grow your money over the medium-to-long term.

 The key difference with investing in a With-Profits fund is a feature called ‘smoothing,’ which helps to reduce the impact of the stock market’s ups and downs. This approach provides a steadier and more predictable investment journey. So, during periods of strong performance, some returns are held back to ensure we can continue paying bonuses even when market conditions aren’t as favourable. Over time, this can result in more consistent growth compared to investments that experience direct market fluctuations.

 We pay these returns on your investment through regular bonuses, which are added directly into your Investment ISA. The amount paid depends on how much you have contributed, how long you have been invested, and the overall performance of the With-Profits fund. Since the launch of our Investment ISA in 2008, the aim of providing steady and predictable returns has been achieved, as we’ve consistently paid bonuses to our members, which has helped them grow their money year after year.

Additionally, if you stay invested over the long term, you can benefit from compound growth. This means that bonuses paid into your plan are reinvested, allowing you to earn returns on the growth you’ve already achieved.

 You can withdraw your money at any time, without any fees. However, during poor market conditions, we may apply a Market Value Reduction (MVR). This means that if you withdraw your money during these times, you might receive less than the current value of your plan. This measure helps protect members who remain invested and ensures everyone receives their fair share of the With-Profits fund. If you stay invested through strong market conditions, you could also receive a final bonus when you withdraw.

 Opening an Investment ISA is simple. You can start with a Direct Debit from just £30 a month, or with a one-off deposit of £100. Once invested, you can easily manage your plan through our mobile app or online platform. Whether you want to top up your investment or adjust your monthly contributions, it’s all at your fingertips. And while we work hard behind the scenes to grow your money, we’ll keep you informed every step of the way with regular updates on how your investment is performing.

 Note that, as with all investments, your capital is at risk, and returns are not guaranteed.

 

What is a self-select ISA?

You can choose to open a self-select ISA by opening an account with a provider that offers this option. A self-select ISA gives you complete control over what you invest in, which could include ​​individual shares, corporate bonds, or exchange-traded commodities.  

Providers may also present you with a selection of specific funds that you can choose to invest in, like our Stocks and Shares ISA. 

What are the benefits of an ISA?

There are many benefits for all the different ISAs, including the following.

• A stocks and shares ISA allows you to invest without paying any tax on returns made (income tax). This makes it one of the most tax-efficient methods of investing.  
• Over time, a stocks and shares ISA has more potential to meet or beat inflation than a cash ISA.  
• With a LISA you will receive a 25% bonus from the government on top of what you have saved. 
• A cash ISA is a safe way to save money without paying any income tax or capital gains tax on any interest you earn.      

Alongside these benefits, you should always remember that a stocks and shares ISA comes with a degree of risk. It may well provide greater growth than a cash ISA over the long-term but investing in stocks and shares exposes you to the stock market, which may fluctuate and see periods of poor performance. This means you could get back less than you put in.  

Be sure to read through our Important Information Guides for the Shepherds Friendly Investment ISA and Stocks and Shares ISA. Remember that when you invest, your capital is at risk.