Types of ISA
There are four different types of ISA most people can choose from:
- Stocks and shares ISA
- Cash ISA
- Innovative finance ISA
- Lifetime ISA
There’s also a junior cash or stocks and shares ISA on behalf of a child or a child that you have parental responsibility for that's under 18
Stocks and shares ISA
A stocks and shares ISA lets you put your money into several different types of investment without having to pay tax on any income or growth. With one, you can invest in company shares, unit trusts, investment funds, corporate bonds, and government bonds.
Cash ISA
A cash ISA is a tax-efficient savings account. Any interest earned on the money you save in it will be tax-free. A standard savings accounts might give you higher interest rates and more flexibility. With a standard savings account, you have to earn at least £1,000 of interest in a tax year before you'll pay any tax on it (or £500 if you’re a higher rate taxpayer).
Innovative finance ISA
An IFISA, or Innovative Finance ISA, lets you earn tax-free interest by lending your money to people or businesses through peer-to-peer platforms. It's a bit different from regular savings or investment ISAs because you're acting more like a lender – and while the potential returns can be higher, there’s also more risk involved.
As with a stocks and shares ISA, an IFISA might perform better than cash savings. But its value could also go down. And there’s one big difference between them. If whoever you’ve lent to goes bust, the Financial Services Compensation Scheme (FSCS) doesn’t cover your investment. You might lose it all.
Lifetime ISA
If you're aged between 18 and 39, and saving for a first home that's less than £450,000, a Lifetime ISA could help you boost your savings. You can put up to £4,000 a year into one and the government will add 25% to everything you save. Depending on the LISA you choose, you can save cash or invest in stocks and shares.
It’s designed to support the purchase of your home, so if you make a withdrawal before you're 60 and it isn’t for either a deposit or because you’re terminally ill, then there are financial penalties.
Junior ISA
If you’re the parent or guardian of a child aged under 18 you can open up a junior cash and/or a stocks and shares ISA for them. Anyone can then pay into it, up to £9,000 per tax year. You’ll manage the account until they’re at least 16, and once they turn 18 it will automatically turn into an ISA. They can then choose to keep the money invested or they can start withdrawing it.
As with any investment, the value of your ISA could go down as well as up, so you might get back less money than you invest.