Stella Demades, Product Director at OakNorth Bank
We are now squarely in “ISA Season”, so you’ve likely read multiple articles about the most competitive ISA products in the market and how best to make the most of your ISA allowance before the end of the tax year.
But what actually is an ISA and why should you be taking advantage of it?
Well with normal savings accounts, any interest you make is taxed, so say for example you deposit £10,000 in a 12-month fixed term deposit account paying 1.3% interest. At maturity, you’ll make £130 in interest which will be taxed up to 45% depending on the tax bracket you belong to. With an ISA however, you can save up to a maximum of £20,000 a year and any interest you make on that will be tax-free.
Pretty good, right? The only challenge is deciding which one to choose as there are now six different types with many offering variations on term and withdrawal. Below, we’ve summarised the different types which will hopefully help you decide!
One of the most well-known and simplest to understand is the Cash ISA. Similarly to other savings products, these can be fixed-term, easy-access or notice and your interest rate will vary depending on what type of product you choose and the term you opt for. In order to ensure your money’s protected up to £85,000, make sure the provider you choose is a member of the Financial Services Compensation Scheme (FSCS). At OakNorth, we offer fixed-rate Cash ISA products ranging from 12-36 months.
For those under the age of 18 looking to start saving or parents wanting to put some money away for their kid/s, there’s the Junior ISA. It allows parents to lay the foundations for their child’s financial future by granting long-term tax-free savings, even if the child starts work. It’s a great way to get children and teens thinking about saving from a young age and developing an understanding of how saving works in terms of interest rates, terms, maturity, etc.
If you’re looking for a longer-term savings product and aren’t afraid to take some risk, then there’s Stocks and Shares ISAs. With this ISA, the money is invested into the stock market, so there’s the potential to earn bigger returns, but capital is at risk and returns can fluctuate – the recent market volatility caused by the corona virus outbreak a good example of how markets can swing. This is therefore typically a product that appeals more to those who are happy to keep the money locked away for a few decades as performance tends to be better over the long term.
The fourth kind, the Help to Buy ISA, is no longer available to new customers but those who already have one, can continue to save into it. An attractive option for first time buyers, the Help to Buy ISA is a government-scheme designed to help first-time buyers get on the property ladder. You can deposit a maximum of £12,000 and the government will top it up with a 25% bonus (£3,000 maximum). To qualify, you must be a first-time buyer, not own a property anywhere else, must intend to live in the property, and the purchase price can’t exceed £250,000 (or £450,000 in London).
Launched in April 2017 and replacing the Help to Buy ISA, is the Lifetime ISA (LISA). Again, this is designed to help people save for their first home or for retirement. You can deposit up to £4,000 each year until you’re 50 and the government will add a 25% bonus to the savings, up to a maximum of £1,000 per year. You can hold cash or stocks and shares in your Lifetime ISA or have a combination of both. The money can only be withdrawn from the LISA with the 25% bonus intact if you’re using it to buy your first home (up to £450,000), if you’re aged 60 or over, or if you’re terminally ill with less than 12 months to live. Through our partnership with Moneybox, we offer a competitive Cash LISA product with 1.4% AER variable in addition to the 25% government bonus. This makes it an attractive product for those saving for their first home who want to capitalize on the government bonus for a few years but avoid the risk of investing in the stock markets.
Finally, there’s the Innovative Finance ISA (IFISA), which lets savers use their tax-free ISA allowance while investing in peer-to-peer lending. An IFISA works by lending money to borrowers in return for a set amount of interest based on the length of time the saver is prepared to leave their money in the account. Similarly to stocks and shares ISAs, it carries more risk but can also lead to higher returns in the long run, so should only be an option for those who are prepared to potentially get back less than they put in.
Given all these options, it’s really important that you make sure you pick the right product for your needs. Take the time to do your research, compare the market, and find a product and provider that aligns with your savings goals.