Taking the first step towards your investment journey can be daunting, as there are different plans to consider, each with their own benefits and finding out what’s right for you can take a lot of consideration. If you’re researching your options, wondering if an ISA is right for you, or asking do I need an ISA? Shepherds Friendly are here to help, as we have a variety of investment plans to suit different needs, and helpful guides to help you kickstart your savings journey.
What is an ISA?
An ISA (individual savings account), is a tax-efficient savings account for United Kingdom residents, designed to allow you to save or invest your money without paying any tax on the interest you may earn from your investment.
Each year you’re given an annual ‘ISA allowance’, which is the total amount you can invest without being taxed. As of the 2023/24 financial year, this limit is £20,000. This annual ISA allowance can be used in one type of ISA, or spread across multiple.
While investing in an ISA is one option, some may choose to invest in a different savings plan. Whether it’s a different type of ISA, such as a cash ISA or a standard savings account. There are some key differences between the different types of ISAs and savings accounts. A savings account or cash ISA has less risk than a stocks and shares ISA, as your money isn’t invested in stocks, bonds or other assets. However, while there’s less risk there is also less room for growth and you may find that your initial investment isn’t worth as much as it used to be due to inflation. For more information, check out our guide ‘What is an ISA?’
Who can benefit from an ISA?
Any UK resident can benefit from an ISA if they’re trying to secure their financial future or their child’s. Many of us have long-term savings goals that we want to achieve. These big goals often take years to achieve and an ISA can help you reach these. When you invest your money in an ISA over a medium to long-term, you allow your investment to grow and don’t have to pay any tax on the returns your plan makes.
Children can also benefit from an ISA as parents can open a Junior ISA for their little one, from the moment they’re born. They will then have 18 years to invest money towards their future, allowing their investment to grow over a longer period of time before they’re gifted with a tax-free lump sum on their 18th birthday.
The Different Types of ISA
There are a variety of different types of ISA, each suited to different people depending on their saving and investing needs.
- Cash ISAs allow you to save with an agreed interest rate, without paying any income or capital gains tax on the interest earned. These are better suited for those wanting a lower risk savings option.
- Stocks and Shares ISAs are invested in stocks, bonds and trusts and allow you to not pay any income tax or capital gains tax on any returns on your investment. They have more risk when compared to a Cash ISA, but there can be higher returns when invested for the long-term.
- Lifetime ISAs (LISAs) are best suited for those saving for their first home or retirement. They allow you to save up to £4,000 each financial year and come with a 25% government bonus.
- Innovative Finance ISAs (IFISAs) allow you to invest in peer-to-peer lending, which could either be a business, individual or property developer. Your funds will be tied up for an agreed time period, after which it will then be paid back along with interest.
- Junior ISAs are a tax-efficient investment plan, with the key difference being only parents or guardians can open the plan to make investments for their child’s futures.
Shepherds Friendly provides two tax-efficient investment ISAs, the Stocks and Shares ISA suitable for those wanting to invest for their future, as well as the Junior ISA, for parents and guardians wanting to save for their child’s future. For more information, take a look at our guide on ISA options.
Stocks and Shares ISA
A Stocks and Shares ISA is a tax-efficient way to invest in a pre-made fund of stocks, bonds, funds and other various assets classes, to achieve your financial goals. As this is an investment plan you may find that you get less than the total amount you put in, however, there is potential for higher returns when compared to a cash ISA. This is why it’s recommended to invest over the medium to long-term to give your investment time to grow and to recover if there’s been poor performance due to economic uncertainty. Remember when you invest, your capital is at risk.
A Junior ISA is designed for parents and guardians to save for their child’s future, allowing them to be gifted a tax-free lump sum on their 18th birthday. This can then be used towards helping them achieve those big life goals, whether it’s towards funding their university education, a deposit for their first home, or help them get their first car. On the other hand, if they would like to continue investing to grow their fund further, they can take control and directly transfer it into an adult ISA. The money saved in Junior ISAs can be saved in either cash Junior ISA or invested in a stocks and shares Junior ISA, similar to how it is with adult ISA’s. Remember when you invest, your capital is at risk.
What an ISA Can Do For You
An ISA can give you peace of mind for your financial future and the freedom to achieve your long-term financial goals. When you invest, any investment growth or interest made from a stocks and shares ISA is tax-efficient, so you won’t pay any tax on any capital gains. When you invest with Shepherds Friendly your savings will go into the Multi-Asset Strategies Fund (MAST) which is managed by Royal London. This is an easier investment option, as the management of your investment is done on your behalf by expert fund managers. Furthermore, you also have the option to save alongside your investment in a cash ISA, however your yearly ISA allowance will be split between any ISAs you have. Remember, when you invest your capital is at risk.
Benefits of Opening an ISA
Opening an ISA benefits both you, and your finances as it will help you work towards your savings goal and give you a greater sense of money management. Additionally, as ISAs can be managed on your behalf, it’s an easier way to invest up to your £20,000 2023/24 ISA allowance, without paying any additional tax on capital gained. Another benefit is, there are no age restrictions when it comes to investing in an ISA, you simply have to be aged 18+, and if you pass away, the proceeds of your ISA can be part of your estate and transferred to the beneficiary.
In summary, if you want to open an ISA and find that you’re asking yourself, do I need an ISA? or if you have a savings goal you want to achieve, there are a variety of choices that could be for you. Whether it’s a cash ISA, stocks and shares ISA, lifetime ISA, innovative finance ISA or junior ISA, each plan has its own ISA benefits, and you should consider what’s suitable for you and your needs. No matter which you choose, the earlier you start investing for your future the better, as this will give you a head start and your money more time to grow over the long-term.
Be sure to read through our Important Information Guides for all the key information about our Stocks and Shares ISA. Remember that when you invest, your capital is at risk.