Best ISA Accounts
With such a wide range of ISA accounts available to invest in, it can be daunting to navigate through the options and work out what type of ISA is right for you. Once you’ve settled on the type of ISA you need, you’ll also need to choose a provider to go with, which can also be a time-consuming process.
This guide will help you understand the different types of ISAs available, the pros and cons of each, and the things to look out for when trying to find the best ISA account for your savings plan.
What are the different types of ISA accounts?
Cash ISA - A Cash ISA is a tax-efficient savings account that provides either a fixed interest rate for a specific term or a variable interest rate with the flexibility to withdraw at any time. Any investments into a Cash ISA can only be held as cash, and so their monetary value cannot decrease. However, with the best 1-year fixed Cash ISA interest rates sitting at around 0.7%, your money may actually be worth less over the long term due to inflation outweighing the interest you gain.
Stocks And Shares ISA – A Stocks and Shares ISA has the same tax benefits as a Cash ISA, which means you can avoid paying capital gains tax on any investment growth. You also won't need to pay income tax on any interest or dividends generated from the underlying investments in your savings account. A Stocks and Shares ISA allows you to invest in the stock market within your account, and so you will need to either pick the investment(s) yourself or speak to a financial adviser who can make a suitable recommendation. Unlike with a Cash ISA, your invested capital could decrease or increase in value.
Lifetime ISA (LISA) – A LISA is designed to help with a house deposit or supplement your retirement. They can be held as either a Cash LISA or a Stocks and Shares LISA, and HMRC will add 25% on top of all the contributions you make.
Junior ISA (JISA) – As with a LISA, a JISA can also be held as Cash or Stocks and Shares and has the same tax benefits as normal ISAs. It is opened for children and operated by a parent or legal guardian until they reach the age of 18, at which point it transfers into a standard ISA in the name of the child solely.
Innovative Finance ISA – Instead of investing in Cash or Stocks and Shares, an Innovative Finance ISA allows you to invest in peer-to-peer lending companies whilst still wrapping the investments with the tax benefits of an ISA. Peer-to-peer lending companies enable you to invest directly to borrowers without the need for either party to go through a bank. The borrowers you’ll lend to will typically require loans for purposes such as home developments, business loans, car financing or medical expenses. The risk is higher compared to a Cash ISA and your investments could fall in value, but the investments may outperform cash considerably over the long term.
The type of ISA you choose will depend on your circumstances and for what reasons you are saving. If you are saving for a first house purchase, for example, it may make sense to open a Lifetime ISA as
HMRC will add 25% on top of your contributions. However, if you make withdrawals that aren’t for a house purchase you will be charged 20% and so effectively lose the 25% government top up. If you don’t buy a property, the other option to avoid this charge is waiting until age 60, but that’s five years later than getting access to your pension and so you need to be aware of the restrictions.
Should I invest in a Cash ISA or a Stocks and Shares ISA?
There are some essential factors to consider when comparing these two types of savings accounts:
● Both Cash and Stocks and Shares ISAs have exactly the same tax benefits.
● The monetary value of Cash ISA investments cannot go down and so you should always get back at least what you put in when you come to withdraw your funds.
● However, if inflation rates are high and interest rates are low as they are currently, your investments will struggle to compete with the return of a well-invested Stocks and Shares ISA over the long term.
● If you’re investing in a Stocks and Shares ISA, you will need to think about the underlying investments held within it. You can invest in Unit Trusts, ETFs, Shares, Investment Trusts, managed portfolios, and many more products, but you may wish to speak to a Financial Adviser for a professional recommendation.
● Investing in Stocks and Shares is higher risk, and so it's a good idea to diversify your portfolio. By spreading the risk, if one of your investments performs poorly it won’t be as detrimental to the value of your broader portfolio.
What charges will I pay for an ISA?
Typically, a Cash ISA will not have any charges, unless for example you have a fixed term and make any early withdrawals before that fixed interest term is up.
However, each Stocks and Shares ISA provider will have varying charges, and this is an important factor to consider when choosing the best ISA for you. Here is a list of the types of charges you may come across when opening an ISA account:
● Account Opening Charge
● Ongoing Administration Charge or Annual Management Charge
● Withdrawal Fees
● Account Closure or Transfer Out Fees
● Dealing Charges
● Underlying Investment Charges
Most ISA providers won’t charge an initial fee, but their ongoing charges are worth paying attention to. Some providers’ ongoing charges will differ depending on whether you are holding equities (investments that trade on a live stock exchange) or Unit Trusts or OEICs, which typically only trade once per day.
You may also find that some ISA accounts will have a tiered fee structure, meaning that you will pay a smaller annual percentage for funds over a certain value threshold.
While it is more challenging to build up considerable wealth in an ISA compared to a regular investment account due to the contribution limits, if you are transferring and consolidating your existing ISAs, they may add up to a considerable value, so a tiered fee structure could be an attractive option for you.
An ISA’s charges will be available through the product literature and terms and conditions for the relevant savings account.
Can I transfer my existing ISAs into a better ISA?
If you’ve found an ISA that you like, then you may be wondering if you can transfer your ISAs from previous years into it. Most ISA providers will allow you to do this, and you will simply need to complete a form with your new ISA provider.
It’s important to bear in mind any transfer out or exit fees with your old provider before doing this, but the benefits of a more appropriate, consolidated ISA may outweigh any fees incurred.
How do I apply for an ISA?
The easiest way to open an ISA is online through the provider’s website. We’ve compared some popular ISA products above, and you’ll be able to navigate to each company’s website to get some more information. Once you’ve decided which ISA is right for you, you can open an account in minutes.
You can either contribute a lump sum of up to £20,000 with a debit card payment or cheque, or set up a monthly direct debit contribution to start building your savings over time.
You can also open an account over the phone with a debit card payment, or with a postal application form for the relevant provider along with a cheque or Direct Debit instruction.
How much can I contribute to an ISA?
The annual ISA allowance is set by HMRC each year, and the current limit is £20,000 per person for the 2021/22 tax year.
How much can I contribute to a Lifetime ISA?
£4,000 per person for the 2021/22 tax year.
How much can I contribute to a Junior ISA?
£9,000 per child for the 2021/22 tax year.
Can I withdraw money from an ISA?
For Cash or Stocks and Shares ISAs, yes, although some Cash ISAs may charge a fee or void your interest if you surrender your policy before the fixed term has ended.
Can I withdraw money from a Lifetime ISA?
For a LISA, you will be charged 20% of your withdrawal if it is not for a deposit on a first home or over the age of 60. This is to counteract the 25% bonus that HMRC will have initially added.
Can I withdraw money from a JISA?
Funds cannot be withdrawn from a JISA until the child is 18, at which point it will convert to a standard Cash or Stocks and Shares ISA in the child’s own name, and withdrawals are permitted as usual.
Can I have a Joint ISA?
No, ISA stands for Individual Savings Account and must be solely owned for tax purposes.
What is a Flexi-ISA?
A Flexible ISA allows you to withdraw money from your ISA whilst keeping your ISA allowance for that tax year.
For example, if you were to contribute £20,000 to an ISA but then withdraw £5,000 in the same year, you would normally not be able to contribute that £5,000 again in the same tax year as you have already used your full allowance, but a Flexible ISA will let you do this.
How do I withdraw money from my ISA?
Most providers will allow you to withdraw from your ISA online, via a mobile app, telephone, or by written instruction in the post.
Can I transfer my Cash ISA into a Stocks and Shares ISA?
Yes, you can transfer from your Cash ISA to a Stocks and Shares ISA at any time. However, do check you won’t lose out by transferring, as some Fixed Rate Cash ISAs may charge a fee or void your interest if you surrender your policy before the fixed term has ended
Can I transfer my Cash or Stocks and Shares ISA into a Lifetime ISA?
Yes, but your transfer will be treated as a contribution and deducted from your annual £4,000 LISA allowance and so you’ll need to be careful not to accidentally contribute over the limit.