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Which ISA is best for me?

Not sure which ISA to pick? Take the guesswork out of it with this quick guide.

04 February 2019Andre Spiteri 3 min read

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With just over two months to go to the end of the financial year, it’s time to think about your ISA allowance. This year, you can save up to £20,000, tax-free. And while you might not be able to afford that much (unless you’re a Snapchat influencer), it makes sense to set aside whatever you can.

But with six different types of ISA account, how do you pick the best one for you?

Well, to help you decide, here’s a rundown of how each one works and their pros and cons.

Cash ISA

Cash ISAs are normal savings accounts, but the interest is tax-free. You can use them for any savings goal — a trip to Europe, next year’s Christmas presents or even a property deposit.

Why pick a Cash ISA?

Cash ISAs are simple, safe and flexible.

You can save as much (or as little) as you like, as long as you don’t exceed your annual allowance. Your money is guaranteed by the Financial Services Compensation Scheme (FSCS). And, if you go for an easy access account, you can withdraw money and put it back throughout the year without losing its tax-free status.

The Cons

Interest rates on Cash ISAs are low. According to Money Saving Expert, the best easy access rate on the market is currently 1.45%.

Some cash ISAs do offer up to 2.3% interest, but you’ll have to tie your money up.

Stocks and shares ISA

Stocks and shares ISAs let you invest in shares, stocks and other investments. Because they’re investments, they’re usually best for long-term goals.

Why pick a stocks and shares ISA?

Stocks and shares ISAs typically have better interest rates. So, you can grow your money a lot more than you would with a cash ISA.

The Cons

● Investing is risky. Your money could grow, but you could also lose some of it

● Your money is tied up. You’ll have to sell off your investments in order to withdraw it

Help-to-buy ISA

This ISA is designed to help you save for a property deposit. You can open one as long as:

● You’re 16 years old or over

● You’ve never owned property anywhere in the world

Why pick a Help-to-Buy ISA?

● The government will top up your savings by 25%, up to a maximum of £3,000

● The bonus applies per person. So if you’re buying with someone else, you can each open a Help-to-Buy ISA and get £3,000

The Cons

● To get the 25% bonus, you’ll need to save at least £1,600

● The bonus isn’t paid automatically. You have to apply for it when you’re close to buying your home. Your solicitor can take care of this

● You must intend to live in the property (that means you can’t rent it out). It must also cost £250,000 or less (or £450,000 or less if you’re in London)

Lifetime ISA

Lifetime ISAs can be either cash or stocks and shares. They’re designed to help you save for:

● Your retirement You don’t have to pick one goal over the other. If you want, you can use some of your savings on a property deposit and leave the rest for retirement. The catch is that you can only open one if you’re aged 18 to 40.

Why pick a Lifetime ISA?

Firstly, because the government will top up every payment you make by 25%, tax-free. So, if you save £100, the government will throw in £25. And if you save £1,000, you’ll have £1,250. That’s before interest, which is also tax free. You’ll keep getting a bonus every time you pay into your account up to your 50th birthday.

Secondly, once it hits your account, the bonus is yours. This means you earn interest on it too, tax-free.

The Cons

● You can only have one Lifetime ISA. Of course, you can still open other types of ISA alongside it

● You have to pay a 25% penalty if you withdraw money for reasons other than a property deposit or retirement

● You can only save up to £4,000 a year

Innovative finance ISA

These invest in peer-to-peer lending. This is a form of borrowing where the borrower borrows from another person or group instead of going through a bank. A peer-to-peer lending platform handles the admin.

Why pick an Innovative Finance ISA?

● You can set aside as much money much as you’d like, up to your annual allowance limit, tax-free

● Interest rates are typically twice the rates on cash ISAs

The cons

● Peer-to-peer lending is risky. Your investment might do very well, but you could also lose money, for example because the borrower can’t keep up with repayments

● Innovative finance ISAs aren’t covered by the FSCS. If a peer-to-peer lending platform goes bust, you could lose your money

Junior ISA

Want to set some money aside for your children?

Junior ISAs let you save cash or invest in stocks and shares. Once your child turns 18, it becomes a regular ISA and they can keep paying into it or withdraw the money.

Why pick a Junior ISA?

● While you must be a parent or legal guardian to open a Junior ISA, anyone can pay money into it — grandparents, uncles, aunts or even friends

● The money belongs to your child, but they can’t touch it until they’re 18

The Cons

● The yearly Junior ISA allowance is lower than the normal ISA allowance. This year, it’s £4,260

Andre Spiteri Image

Written by Andre Spiteri

Financial Writer

Andre is a former lawyer turned award-winning finance writer.