An ISA, or Individual Savings Account, is a tax-efficient savings plan. Trying to choose which ISA is the best option 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 keep in mind?
Once you have chosen one of these ISAs, you then have further options to tailor your savings account to you. If you choose a cash ISA, you can then decide between a variable or fixed interest rate. If you choose an investment ISA, you can then choose to have full control over your investment decisions, or invest into a ready built-portfolio. If you’re not sure which type of ISA is the best choice for you, we’ll take a 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, cash, innovative finance and lifetime ISAs. These ISAs all work in different ways, and each carries 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 in order to decide which is the best option for you.
A cash ISA is similar to 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 pay no income tax or capital gains tax on your cash ISA account, 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 (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 a borrower, which could be a business, an individual, or a property developer. 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 have to 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 and 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 managed ISAs and actively managed ISAs, such as our stocks and shares ISA usually spread your savings across a variety of stocks and shares, equities, bonds, and property.
On the other hand, you can take matters into your own hands and pick 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, then it might not be the best option for you.
When you invest with us your savings will be invested into the Multi-Asset Strategies Fund (MAST) and managed by Royal London Asset Management (RLAM). Your money will be invested responsibly, screening out or limiting investments which may be considered harmful.
Learn about how we manage our members’ money in our video on with-profits investing.
What is a self-select ISA?
On the other hand, 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.
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 the most tax-efficient method 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 bear in mind 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 all the key information about our Stocks and Shares ISA. Remember that when you invest, your capital is at risk.
Past performance cannot be taken as a guarantee of future returns.
Bonus rates vary from year to year depending on the performance of our investments and in some years we may not pay out any at all.
HM Revenue and Customs may change the tax status of an ISA in the future.
Inflation and making regular withdrawals may affect the purchasing value of your investment in the future.
If you have been invested through periods of poor investment performance, and you leave the fund, you may get back less than the current value of your plan. This is known as a Market Value Reduction (MVR)
When you take out an investment product with us your capital is at risk and you may get back less than you have put in. All references to taxation are to UK taxation and are based on Shepherds Friendly Society’s understanding of current legislation and H M Revenue and Customs practice which may change in the future. Investment growth is by means of bonuses, the amount of which cannot be guaranteed throughout the term of the contract. Please ensure that you read the full terms and conditions of this plan which are available from your financial adviser or by contacting us directly.
Please note: No advice has been given by Shepherds Friendly, and if you are in any doubt as to whether a savings plan is suited to your needs, then you should contact a financial adviser. There may be a charge for financial advice, and the cost should be confirmed to you before any advice is given.