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ISAGuideNavigating the ISA maze

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ISAs are the first place that savers should look to put their cash when they are planning their finances, after all when the Government is giving you a tax break, you should grasp it with both hands.

However, over the years they have become increasingly complex, with many people struggling to understand the different types of ISA available, let alone work out how much they can put in which, at what stage.

So, this guide is designed to help you cut through the complexity and maximise the benefits of using ISAs to your advantage.

What is an ISA?An Individual Savings Account (ISA) is a type of tax-free account, which can be used by savers to hold either cash or investments.

Each tax year, every individual over the age of 16 (although you must be 18 to open a stocks and shares ISA) is given an ISA allowance, which is £20,000 for the current tax year.

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A brief history of ISAs

TaxYear Cash ISA Limit

Stocks& Shares ISA Limit

Total ISALimit

1999/2000 £3,000 £7,000 £7,000

2000/2001 £3,000 £7,000 £7,000

2001/2002 £3,000 £7,000 £7,000

2002/2003 £3,000 £7,000 £7,000

2003/2004 £3,000 £7,000 £7,000

2004/2005 £3,000 £7,000 £7,000

2005/2006 £3,000 £7,000 £7,000

2006/2007 £3,000 £7,000 £7,000

2007/2008 £3,000 £7,000 £7,000

2008/2009 £3,600 £7,200 £7,200

2009/2010 £3,600 * £7,200 * £7,200*

2010/2011 £5,100 £10,200 £10,200

2011/2012 £5,340 £10,680 £10,680

2012/2013 £5,640 £11,280 £11,280

2013/2014 £5,760 £11,520 £11,520

2016/2017 £15,240 £15,240 £15,240

* ISA limit increased to £5,100 (cash ISA) /£10,200 (stocks &

shares/total) for people aged over 50 from Oct 2009

2014/2015

[until30/06/2014]

£5,940 £11,880 £11,880

2014/2015[from01/07/2014]

£15,000 £15,000 £15,000

2015/2016 £15,240 £15,240 £15,240

2017/2018 £20,000 £20,000 £20,000

2018/2019 £20,000 £20,000 £20,000

On April 6, 1999, ISAs were introduced by the Labour Government at the time, replacing Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).

PEPs were the precursor to the stocks and shares ISA, whereas the TESSA was, in many ways, similar to a cash ISA. The ISA allowance at the time was £7,000 in total, of which up to £3,000 could be placed in a cash ISA.

Over the years there have been a number of changes to the ISA allowance and since 1 July 2014, the whole of the ISA allowance could be placed, if desired, in a cash ISA.

The table to the right shows the allowance each tax year since the inception of the ISA and, as you can see, the allowance has increased significantly to the current limit of £20,000.

While the allowances have increased and savers have been given more flexibility on what they can invest in and how the allowance is split, there have also been a number of other ISA types thathave been introduced in that time.

You can now put your entire allowance in a cash ISA, a stocks and shares ISA, an Innovative Finance ISA, a Lifetime ISA (up to a maximum of £4,000) or split it between these four types. It is worth noting that you are not able to contribute to more than one of each type of ISA per tax year.

2019/2020 £20,000 £20,000 £20,000

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Help to Buy ISAsHelp to Buy (HTB) ISAs were introduced in December 2015 and are cash ISAs that are designed to encourage first time buyers to save money on a regular basis for their first home.

The account is available to all first-time buyers aged 16 and above. Up to £200 per calendar month can be saved in the account, with an initial opening deposit allowed of up to £1,000 in addition, meaning that a total of £1,200 could be invested in the first month.

The Government will top up the amount saved by 25%, subject to a minimum bonus of £400 and a maximum of £3,000, so you need a balance of at least £1,600 to earn the bonus at all. The bonus is paid via the solicitor or conveyancer on completion of a UK property purchase, which must be used as a main residence, with a maximum value of £250,000 (or £450,000 in London).

As with any cash ISA, interest will be paid tax free and it is also worth noting that if a property is being bought in joint names and both are first time buyers, they will each be able to open an HTB ISA, potentially accruing double the amount and double the bonus.

However, it is worth noting that Help to Buy ISAs will not be available indefinitely. You have until 30 November 2019 to open one and then your bonus must be claimed by 1 December 2030.

You can only pay into one HTB or cash ISA in any tax year, although if you have opened a cash ISA already in the tax year, you can transfer up to £1,200 from a cash ISA into an HTB ISA. Anything more will need to be transferred into a stocks and shares ISA, Innovative Finance ISA or moved into a non-ISA account, according to the rules.

However, some providers offer portfolio ISAs, allowing those who want to use their full cash ISA allowance to pay into more than one type of cash ISA with them.

The generous bonus from the Government is a great incentive for first-time buyers to start putting money aside,even if the prospect of buying a house is still some way off. The interest rates on offer really are the icing on the cake and although not every provider offers an HTB ISA, there are some competitive rates to be found.

Contact us for more information on the top Help to Buy ISAs on the market at the moment.

What are the differences between each type of ISA?

Cash ISAsCash ISAs are tax-free savings accounts similar to any standard bank or building society account, but without the requirement to pay tax on the interest earned. Account types include easy access, notice and fixed rates.

The interest you receive will vary according to the institution offering the account and how long you are tying your money up for.

The money that you deposit in a cash ISA will not be lost, unless the provider chosen goes out of business. Even then, this risk can be mitigated by ensuring you do not place more than the Financial Services Compensation Scheme (FSCS) limit (currently £85,000 per person) with any one provider or providers which share a banking licence.

The way cash ISAs work is arguably the simplest to understand, but the plethora of new types of cash ISA available and the introduction of the Personal Savings Allowance (PSA) in 2016, has added to the level of complication savers must find their way through. So, we will take each of the different types of cash ISA in turn:

Variable rate cash ISAs

If you choose a variable rate cash ISA, you can access your money straight away or choose a notice account, which means you have to wait a set period before you can withdraw your money without penalty. Often, but not always, notice ISAs will pay a higher rate of interest.

Easy access ISAs usually offer unrestricted access to your money, but there are a number of accounts on the market that restrict the actual number of withdrawals you can make each year. Falling foul of the rules could see your interest rate plummet, so it is important to check the small print before choosing these accounts.

If you choose a cash ISA with a notice period, expect to see notice periods ranging between 30 and 180 days. Often the longer the notice period required, the higher the interest rate is, but this can vary widely between providers.

You should always look at the alternatives carefully, as there may be a provider that offers a higher interest rate with a much shorter notice period, which gives you more flexibility.

Contact us for more information on the top variable rate cash ISAs on the market at the moment.

Fixed rate cash ISAs

Fixed rate cash ISAs offer a fixed rate of interest for a specified term, usually between one and five years.

While Fixed rate cash ISAs will allow you to access your funds before the end of the chosen term, you usually have to pay a hefty penalty to do so and in some cases this will mean having to close the account or transfer it to another provider.

There are a small number of accounts that allow you a limited number of penalty-free withdrawals, but if you go over this amount, penalties will apply. Fixed rate cash ISAs are more suitable for those who do not need access to their money and are happy to tie it up for the term.

Usually the rates are higher the longer the term you choose, but you must make sure that you are comfortable to tie your funds up for that period.

Contact us for more information on the top fixed rate cash ISAs on the market at the moment.

Regular saver cash ISAs

Just like standard regular savings accounts, regular saver cash ISAs are designed for those looking to put aside money each month. This could be to save for a specific purpose, such as a car or holiday, for a rainy day or just to get into the savings habit.

Saving regularly is a great discipline, but remember once you pay into this type of cash ISA, you would be unable to pay into another ISA in that tax year.

So, it is important to plan how you will use your cash ISA allowance and if you think that you may pay in a lump sum at any point, to consider a variable or fixed rate ISA instead.

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LISAs can be used in addition to a pension, so individuals will be able to contribute to both.

However, you would be wise to seek advice from an independent financial adviser for individual retirement planning, as using only the LISA may not be the best option, especially if you are eligible for a workplace pension.

Many providers are yet to offer a LISA, but hopefully the market will open up over time. We will, of course, keep you updated on the best options on the market, as they become available.

Contact us for our Lifetime ISA Factsheet or to discuss the cash options available.

There is also an ISA vs Pensions guide available which helps you to consider which methodof saving would be best for your retirement planning.

If you would like any further information, please call us on 0800 0119705.

Junior ISAsJunior ISAs were introduced in November2011 and were originally only available to children born on or after 3 January 2011, or born before September 2002, or those that did not qualify for a Child Trust Fund (CTF).

They replaced CTFs, but unlike the CTF there was no Government contribution to a Junior ISA. Initially, it was not possible to transfer a CTF to a Junior ISA, meaning some children were stuck in these accounts, while providers focused their attention - and rates - on the newer Junior ISAs. That rule changed in April 2015, so CTFs can now be transferred and those children can access the higher returns available.

You can open a Junior ISA for your child from birth and it is run by the parent or guardian until the child reaches 16, when he or she can take control of the account until they are 18.

No withdrawals can be made from the account until the child reaches 18. You can only hold one Junior cash ISA with one provider, although you are able to transfer it to an alternative if a better option is available elsewhere.

You can choose between stocks and shares and cash for the investment or a combination of the two, up to the Junior ISA limit. In the current tax year, the limit is £4,260 (rising to £4,368 in the 2019/20 tax year) and, once opened, the account can be topped up each tax year by parents, friends and family up to this limit.

Once the child reaches 16, he or she is able to open a cash ISA in addition to a Junior ISA, benefiting from both allowances in that tax year.

Typically, interest rates on Junior cash ISAs are higher than on adult cash ISAs and it can be a great way of building up funds for a child’s future both for parents and other family members, giving them a great start to adult life.

Contact us for some of the highest paying Junior cash ISAs available on the market at themoment.

Lifetime ISAThe final type of ISA is the most recently introduced, the Lifetime ISA (LISA) which has been available since April 2017. Like Junior ISAs, you can choose between holding your funds in stocks and shares and cash or having a mixture of the two types.

The LISA is available to those aged between 18 and 40 and is designed to assist younger savers to put money aside for the purchase of their first property or for their retirement.

You can save up to £4,000 in a LISA per year and the Government will add a 25% bonus to funds saved, up until the age of 50. Therefore, you could receive up to £1,000 per year towards your future goals.

The first option is to use the savings held in the account and the bonus accrued to purchase your first home, up to a maximum property value of £450,000. LISAs are not limited to one per home, so two people purchasing together can each receive a bonus in their own right.

If you do not use the funds to buy your first home, you can take out the funds tax free after your 60th birthday to go towards your retirement fund.

You can take funds out of the LISA before the age of 60, but if this is not for the purchase of your first home, you will lose any bonus accrued so far, plus any growth or interest received on the bonus.

The LISA is an interesting option for younger savers as it allows you to start building up your savings for a home or your retirement, without having to decide at the outset. It follows on from the Help to Buy ISA as it offers an incentive to save in the form of a Government bonus, but also caters for those already on the property ladder or planning for their retirement.

It is also important to note that if you have both a LISA and a Help to Buy ISA, you can only use the bonus from one of them for the purchase of your first home.

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Other types of ISA

Stocks and shares ISAs

These provide a tax-efficient wrapper to hold various types of investments, including shares, unit trusts, investment trusts, exchange traded funds (ETFs), corporate and government bonds.

Income or asset growth within a stocks and shares ISA is free of both income and capital gains tax. As with any investment, the value of your stocks and shares ISA could go up and down overtime.

If you would like more information about stocks and shares ISAs, we can put you in touch with a chartered financial planner, call us on0800 011 9705 for more information.

Innovative Finance ISA

This type of ISA, launched in April 2016, enables those interested in peer-to-peer (P2P) lending to undertake this through an ISA wrapper, so their interest payments and capital gains will be free of tax.

P2P lending can offer higher returns than cash savings accounts, but there is a risk that your loan may not be paid back, which means they are more risky than traditional accounts.

Cash savings, including cash ISAs, are covered by the Financial Services Compensation Scheme (FSCS) should a provider go out of business, whereas funds held in an Innovative Finance ISA are not. A number of P2P platforms have contingency funds to protect investors from loan defaults, but this does not provide Government-backed protection for your funds.

Innovative Finance ISA savers need to be aware that their capital may be at risk and their investment may not perform to the level expected. A total loss of capital may occur and, as a result, this type of ISA may not be suitable for everyone.

ISAs on deathBefore April 2015, when you died, the tax efficiency of your ISA portfolio died with you, meaning that any surviving spouse would not continue to benefit from the tax-free income or growth enjoyed during your lifetime, but this has now changed.

From April 2015, if you were married or in a civil partnership and your spouse or civil partner died on or after 3 December 2014, your spouse will benefit from an additional ISA allowance (known as an Additional Permitted Subscription) equivalent to the value of your ISA accounts. They do not have to inherit the money actually held in the ISA to make use of the Additional Permitted Subscription.

The Additional Permitted Subscription allowance is available for a period of up to three years after your spouse’s death,where the investment is made as cash.

The only exception is if the administration of the estate takes a significant amount of time, then you have up to 180 days after the date the assets are distributed from the estate, if this means the time is greater than three years.

New rules introduced in April 2018 mean that an ISA will now become a 'continuing account of a deceased investor' and will continue to benefit from the tax advantages of an ISA. No further money can be paid into the ISA but the tax free status will last until the administration of the estate is complete, the closure of the ISA or three years after the death of the account holder, whichever is earliest.

This is a key change, as previously all ISAs became taxable on the death of the account holder and it therefore allows the surviving partner to earn tax-free growth on the funds held until the estate is finalised.

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Moving money between ISAs

Now you have read through the options, if you decide you want to move money between ISAs, we need to sound a note of caution: you must not close an ISA in an attempt to move money to a new one. Instead, you need to undertake an ISA Transfer.

Closing an ISA account ends the tax benefits for the money you held in that ISA, but transferring it to another ISA without closing the account is possible - and it is the only way to ensure you retain the tax benefits on that ISA money.

You should contact the ISA provider that you want to move your money to and ask them to start the process for you. They will contact your existing provider and get the ballrolling.

Not all ISA providers will accept transfers, so you need to make your choice carefully. But Savings Champion can help you navigate this minefield. Call us on 0800 011 9705 or email info@savingschampion.co.uk.

Flexible ISAs

Rule changes have also been made when it comes to how you can use the money in your ISAs. Previously, if you withdrew money from an ISA, you could not put that money back into it without it counting towards your annual ISA subscription amount.

Now, you can take money out of your ISA at any point, providing it is a Flexible ISA, and replace it within the same tax year – this applies to historic ISAs as well as the one you are saving into for this tax year specifically.

For example, if you have £50,000 in a flexible ISA, including £5,000 of this tax year’s allowance, you still have £15,000 that you can add to the ISA within this tax year’slimits.

In you need to withdraw £15,000 in the meantime, you will be able to add that back into your flexible ISA, plus the remainder of this year’s allowance – so up to £30,000 – as long as it is within the same tax year as the withdrawal.

Not all ISAs are flexible – it is up to the providers whether they offer this as part of their product or not and there are specific rules on how the withdrawals have to be transacted (withdrawals have to be transacted as cash, meaning that any investments held have to be sold first) – so you should check before you make any withdrawals to see what the rules are with your provider.

PortfolioISAs

Whilst ordinarily you can only pay into one cash ISA per tax year, a small group of providers will allow you to open several different types of cash ISA with them.

For example, if you wanted to pay into a Help to Buy ISA, but also wanted to use the rest of your ISA allowance, some providers will also let you open, for example, an easy access cash ISA.

Other providers will allow you to open a mix of variable rate and fixed rate cash ISAs.

It is important to note that not every bank or building society will allow this, so check carefully with your chosen provider before proceeding, if you intend to make use of this feature.

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What next for ISAs?

The death of the ISA has long been mooted, as interest from providers has slumped in recent years, but there is currently something of a resurgence in the savings market across all types of accounts.

The Personal Savings Allowance (PSA) - which means you can receive up to £1,000 in interest before you have to pay any tax on it – was held as one reason why ISAs were no longer worthwhile.

However, if you have put the full amount into ISAs since their inception and received just the Bank of England base rate as a return, you would now have more than £100,000 in your ISA accounts.

At some stage in the future the PSA could be removed by MPs, which would prevent you from having any of that savings interest outside an ISA paid tax free. They may change the ISA rules, of course, but even if they do there is less chance they would change the cash ISA’s tax-free status retrospectively.

So, even with the introduction of the PSA, the upturn in ISA savings rates on offer and the ability to save significant amounts tax efficiently means there is still plenty of life in ISAs yet.

For more information on any of the ISA accounts available, please contact Savings Champion on 0800 011 9705 or by email at info@savingschampion.co.uk.

The information provided is for guidance only and based on our current understanding of HMRC practice and therefore does not constitute personalised advice.

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Contact Us

Savings Champion Cambridge House HenryStreetBath BA11BT

Telephone: 0800 011 9705

email: info@savingschampion.co.uk

website:www.savingschampion.co.uk

Company Registration Number: 07805574

Registered Address: SavingsChampion.co.uk,

No 2 The Bourse, Leeds, LS15DE