How Safe Is My ISA?
Whether you’re looking for an Investment, Cash, Innovative or Junior ISA, are a popular way to gain interest and returns without having to pay tax on what you make. But what are the risks of each type of ISA? We’ve gone through each ISA type and explained the risks, to make sure it’s clear for you.
The risks associated with an ISA differ depending on the type of ISA account; it's helpful to make sure you know the risks of each type before you make a decision about which one you want to open.
Is My Cash ISA Safe?
Cash ISAs are fairly low-risk; they are similar to savings accounts in this regard.
Your money will be kept in an account and gain the interest which was advertised by the account.
Your money will not be invested and therefore there is no risk of the market fluctuations affecting any money you keep in this account.
Please be aware that inflation can eat in the real value of your cash over time.
Is my Investment ISA Protected?
The short answer: no....and yes.
Your investments will not be protected from fluctuations in the stock market.
That is the nature of risk with investing – you have the possibility of getting less money back than you put in due to market peaks and troughs. So, you could in theory lose money as a result of large market fluctuations - thus why the sharp market drop following the Coronavirus impact was quite to concerning for investors.
But, fluctuations are not uncommon in the market and the wisest thing you can do is to weather the storm - the dip will highly likely return to an upward trajectory and level out once again.
We've recently written a blog about what to do with your Stocks and Shares ISA in the face of the recent market disruption, so if you want to read more that's a great place to start.
There are protections in certain situations – for example, in the extremely unfortunate event that your fund manager goes bust then you are protected by certain schemes.
What you need to know is:
- If you end up in a sticky situation with your fund manager, then your money is protected up to an extent.
- Most ISAs, including Stocks and Shares ISAs are protected by the Financial Conduct Authority (FCA) which is an independent regulatory body. They regulate the conduct for most of the UK's financial bodies.
- If your fund manager runs into issues and is unable to repay your money, then you could be compensated by the Financial Services Compensation Scheme (FSCS) for amounts up to £85,000 - per person, per institution. This is the UK's statutory compensation scheme.
- This will protect the investments of the vast majority of people - but if you have a considerably large amount of investments (i.e. greater than £85,000) you should ensure your investments are spread across multiple different platforms to efficiently protect your money.
What about my Junior ISA?
The level of risk associated with a Junior ISA depends on the type of JISA you’ve opted for – if you’ve got a Cash JISA, then you should refer to the earlier part of the blog on Cash ISAs.
If you’ve opted for an Investment JISA, then you should refer to the previous Investment ISA section of this blog; that will give you everything you need to know. One of the benefits of JISAs is that if you open them when your child is young, there will likely be more then enough time for the fluctuation of the market to run it’s course.
What do I need to know about my Lifetime ISA?
Similar to Junior ISAs, the risks associated depend on the type of Lifetime ISA you go with; if you decide to go with a Cash LISA, then there are very few associated risks.
With an Investment LISA, then the associated risks are the same as with any investment in the stock market – you could get less out then you put in.
It’s important to consider this, and also make sure that you try to hold your stock as long as possible (ideally five years) to allow for the fluctuations of the market to run their course.
How about Peer to Peer ISAs?
Peer to Peer ISAs are a higher level of risk – they’re better suited to a more experienced investor. With higher risk, comes higher reward, as these account types usually boast larger returns and are a good way to diversify your portfolio of investments.
It’s unlikely that they will be protected by the FSCS scheme, so you could stand to lose any money you invest should that investment not perform well; and since it’s not protected, you have no coverage to get it back.
That’s why it’s very important to read the fine print – check what is and isn’t covered or offered by the provider and the ISA type you have selected.