A Little Bit Richer

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Iona Bain: Hello, I'm Iona Bain, and welcome back to A Little Bit Richer, the podcast where we break down big financial topics into digestible steps for your future. Now, today we are revisiting a topic that is essential for your long- term financial health, and that's individual savings accounts, aka ISAs. With new changes announced in the autumn budget regarding cash ISA limits, the ISA landscape is shifting.

So we wanted to dive deeper into the different types available so that you can decide which one fits your current life stage. So whether you're saving for your first home or your next home, starting a family, or you're just trying to protect your hard- earned money from inflation, understanding these tax efficient wrappers is a total game- changer. And to help us do all this is Paula Hughes. Paula works in the ISA product team at  L&G and so is very well placed to give us some insights on this particular topic.

So Paula, to kick things off, I'm going to put you on the spot, but I think you can handle it. Can you explain why we should care about ISAs in 30 seconds or less? Are you ready?

Paula Hughes: I think so.

Iona Bain: You'll nail it.

Paula Hughes: First of all, we have to start with the fact that they're tax- free, and that means that you can have a tax- free interest on your savings if that applies to you. And also as it grows, it's tax- free growth as well. So no capital gains tax. There are different types of ISAs for different needs, so hopefully people will be able to see the one that suits those. And I think finally, the earlier start, the better it is as you have that compound effect of interest growing over time.

Iona Bain: Oh, you just did it.

Paula Hughes: Just did it. Great.

Iona Bain: Well done. So can you talk us through the main types of ISAs that are available and how you would know which one to choose?

Paula Hughes: Yeah. And it can be quite overwhelming because there's four main types of ISA all with a slightly different own rules as well. So if I try and break that down as simply as possible. So the most common one that people tend to know about is the cash ISA, and that is for cash savings. The next one is a stocks and shares ISA, and that's for investing. So a stocks and shares ISA can take various different forms. You can invest directly in the stock market, or you can invest through investment funds, and the fund manager chooses those stocks and shares for you. With a stocks and shares ISA, any amount that grows in the fund is tax- free. So those dividends don't have income tax and also any growth is free of capital gains tax as well.

Iona Bain: Right.

Paula Hughes: So they're the first two main ones. They're available to anybody in the UK who's over 18. And then we have two other ISAs that are restricted to ages and specific saving goals. The first one is a lifetime ISA, sometimes called a LISA or a LISA, depending on how you want to pronounce it. These are available to 18 to 39 year olds and they're for two specific saving goals. So firstly, buying a home and secondly, retiring. The benefit of a LISA is the government can also add a bonus for you, but you should be aware that if you don't save for one of those goals for a different reason, or if you want your money out early, then you could forfeit the bonus and also have a penalty included. So that's something to watch out for with a LISA.

Iona Bain: Yeah, you've got to really commit to it.

Paula Hughes: Absolutely. Then there's a junior ISA, which as it says on the tin is for children's savings. And lastly, an innovative finance ISA, which is difficult sometimes to say, but that's more of a niche product and it's peer-to-peer lending that comes with a higher risk. So quite a lot of choice, I would say. And I think to your first question really, how do you choose between all of that? It's a personal decision, but I think really you start off with thinking, what are you saving for? What your savings goals? Over what time horizon? When do you want access to your money? And how flexible do you want that accessibility to be? And what kind of risk do you want to take? Is it zero risk or is it higher risk?

So just think about the types of risk, and that could be different risk for different time horizons. If you're not sure and you just want to save just because you've always thought you should be saving for the future, then maybe choose something that's got less restrictions on it and without any penalty if you did need to get your money out sooner than you might intend.

Iona Bain: That's a really helpful overview, Paula, because at first glance, the ISA family does seem a bit daunting, but actually you broke that down in a really, really easy to understand way. But how do you know which one to choose?

Paula Hughes: Just start small. And if you think about whether you want to mix and match, maybe do a little bit in cash, first of all, because cash is familiar to lots of people. And as your confidence grows, think about a stocks and shares ISA that does have lower risk funds as well. So you can just start and as your confidence grows, you can build as you go along.

Iona Bain: Always being aware that there is risk with stocks and shares ISAs.

Paula Hughes: Absolutely. Yes. Thank you for keeping me honest there. There is a risk with stocks and shares ISA. So whilst investing does have the potential and aligned to outperform cash, there is a risk to stocks and shares ISA. It is an investment. So I think that's a really good point in terms of how you choose to think about your savings horizons. So broadly speaking, cash is short- term savings, so below five years. Stocks and shares ISA tends to be medium to longer term savings, five years plus. And the reason we say that is because it's invested in stocks and shares, which goes up as well as down. So hopefully you can ride out those fluctuations to have an upward trend over the five years plus.

Iona Bain: That's good to know. And anyone who has a cash ISA, would they be paying tax on the interest that they earn anyway, even if they didn't have a cash ISA?

Paula Hughes: So not necessarily. It does depend how much you earn. So if you're a basic rate taxpayer, you can have up to 1, 000 pounds on interest, for a higher rate taxpayer that goes down to 500 pounds. And if you've got an additional taxpayer, it goes down to zero. So it does depend really on how much you earn, but also if you think about, for example, stocks and shares ISA, that could grow over time to quite significant amounts. And you might find yourself in a position where you might have to pay capital gains tax. So everybody, I guess, is unique to their own tax position.

Iona Bain: And interest rates are also really important, but you might not necessarily always get the best deals on cash ISAs compared to other types of savings. Is that right?

Paula Hughes: That's absolutely correct. Yes.

Iona Bain: And when it comes to deciding whether to take out a cash ISA, what should people be looking at? Because often interest rates play a big factor in people deciding where to put their savings.

Paula Hughes: There are so many cash savings account in the market, both cash ISAs, and also just standard cash savings account as well to look at all the different interest rates that are payable and just make sure that you're getting the best one for your money. So it's really important with any savings vehicle, and this goes for stocks and shares, check the fees, check the charges as well, because there are some charges with stocks and shares ISA, and just do a comparison to make sure that you're going to be better off, I guess, from investing in these areas as opposed to maybe some accounts that you might be leaving.

Iona Bain: So you mentioned about cash ISA limits before. In the autumn budget, there were some changes to those limits. Can you talk about that and why the government has decided to make those changes and what that might mean for people?

Paula Hughes: As an ISA geek, it's a really exciting time for ISAs in April 2027. The limits are applying to the cash ISA, as you say, and we are a nation of cash savers. We love cash in the UK, which is great. Cash is not a bad thing. It's absolutely got its place. However, it's not maybe the best place to put your money over the longer term, because obviously the effect of inflation does downgrade the value, I guess, of cash purchasing power over longer term. So the government obviously recognizes this and wants to create a culture of investing in the UK. And so it's made some changes to the cash ISA allowance to try and encourage people to start thinking about maybe investing in things like stocks and shares ISA to complement their cash savings.

So the changes they've made are to the amount you can put in to the cash ISA. It's probably worthwhile just spending a little bit of time of where we are now and what those changes are going to. So in terms of the amount you can put in, you can put 20, 000 pound per person, per tax share. So historically with a cash ISA and stocks and shares ISA, you could put all your 20,000 pounds into the cash ISA if you wanted to. Obviously it's a generous amount. Most people don't have the 20,000 pounds to invest in there, but if you have, that's great and you could do that.

What the government will be doing from April 2027 for under 65s is limiting the amount you can put within that 20,000 pound allowance into cash to 12,000 pounds. And that's to encourage people to start thinking about investing in the stocks and shares ISA.

Iona Bain: I see. So the change here is that if you had 20,000 pounds to put into a cash ISA, now you're limited to 12,000 pounds, maybe, so the thinking goes, you'll put the other 8, 000 into a stocks and shares ISA.

Paula Hughes: Yes. That is the hypothesis. But of course, I think along with that, it's really important to have lots of financial education for people to understand a little bit more about stocks and shares ISA, especially if it's the first time that people have considered investing.

Iona Bain: Yeah, absolutely. And if somebody has a preference to save into cash rather than invest in stocks and shares, what would you say to them?

Paula Hughes: Cash is a really good savings vehicle and it's here to stay. It's familiar with people. It gets people starting saving, which is one of the big gaps in the UK in terms of people saving for building financial resilience. However, it's probably not the best place potentially to put your money for the longer term. And that's because over time, cash tends to not be able to keep up with purchasing power because the effect of inflation. If you think about 5, 10 years ago, the price of buying a bar of chocolate even compared to now, but yeah, cash does struggle to keep up with the purchasing power.

Whereas if you're investing, that does have the potential to outperform cash because of the different places it invests in. However, as you say, it can go up as well and down, so it's not guaranteed, which is why we say you need to think about it for five years plus to eke out those market fluctuations. So I don't think it's a case of cash or investing. I think it's a case of cash and investing.

Iona Bain: Yeah.

Paula Hughes: So just do both of them because they both complement each other. Cash for the shorter term, investing for the medium to longer term.

Iona Bain: Yeah. Team cash and team investing.

Paula Hughes: Yeah. And I tell you, Gen Z have got it right. So it's about 40% of 18 to 25 year olds already holding investments. So the power of social media for financial education has really worked for a force of good there.

Iona Bain: Yeah. And starting young could really benefit them in the long term if they're already investing aged 18, 19, 20.

Paula Hughes: The earlier you start, like anything, the better it is.

Iona Bain: Yeah, that's definitely something to consider. Food for thought. Now we're coming into ISA season now. This is something that people might see in the media. They might wonder, what on earth is ISA season? It does not sound as fun as other types of seasons, but there are some smart things that people should do before the new tax year starts, especially when it comes to their ISA. Can you talk me through what those might be?

Paula Hughes: Yeah. So ISA season, as you say, which is really exciting for people like me, but not necessarily as exciting as other seasons like Christmas.

Iona Bain: Hey, look, maybe we can make it trendy and cool and fun and exciting.

Paula Hughes: That's exactly what I aim to try and do. Yeah. So in terms of April being, I guess the important date, as we said, if you are lucky enough to be able to have 20,000 pounds of that allowance to invest, then the clock does restart on the 6th of April. So make sure that you do it before the 5th of April, otherwise you will lose that allowance. So that's the first part of why April is so important.

But even if you're not looking to invest 20, 000 pound, which the majority of people don't, I think it's always good to have a goal to look at your personal finances, certainly for myself. Otherwise, it's one of those things that you mean to do and you never quite get around to it because there's always more exciting things to think about. So in terms of April and ISA season, it's a good time to think about starting to save. Just start to invest.

As we said, the earlier you start, the better that can be over time. There's the thing called compound interest, which is if you start investing now, not only do you have tax- free interest in ISA on the amount you invest, but also you have interest on that interest as well. So start investing or saving. If you're already doing it, think about increasing the amount you put in just a little bit. You can increase from a pound, 5 pounds. It doesn't have to be a lot. If you've already done an ISA, great. Well done. Fantastic.

Iona Bain: Tick.

Paula Hughes: But just maybe think about reviewing the fees and the charges in your ISA, because ISA products are changing all the time. It could be that you might be better off transferring to a different product with lower charges or better interest rates, which means more money in your pocket. A word of warning there though, if you do look at transferring, make sure you do it between the providers rather than take the money out and then put the money into another product. The reason for that is if you do it between providers, you don't use your allowance. If you take it out and put it in of yourself, it goes towards your 20,000 pound allowance. So if you're going to move money, ask the providers to do that between themselves, not taking the money out and reinvesting.

Iona Bain: You don't touch it yourself.

Paula Hughes: Don't touch it yourself.

Iona Bain: You let them take care of it.

Paula Hughes: Absolutely. Absolutely.

Iona Bain: And can you just quickly talk us through the different options available if you're interested in taking out a stocks and shares ISA?

Paula Hughes: So you do have options in terms of the types of stocks and shares ISA you want as well. So you can either choose to invest directly into the stock market where you choose individual company funds and stocks and shares, or you can invest via something called an investment fund where the fund manager chooses underlying stocks and shares for you. So it really depends how involved you want to be in choosing those underlying investments, or if you just want to leave it to an investment fund manager to do that picking for you.

Iona Bain: So let's just chat briefly about myths surrounding ISAs and investing. And these might put people off. Let's try and bust some of those myths.

Paula Hughes: I think the first one really is that you need a lot of money to start investing, and that is not the case. So for most stocks and shares ISAs, they start from about 20 pounds a month. There are some that start lower than that, but that's broadly the amount that they start from. And you can stop, start, add to that whenever you want. So it's pretty flexible. So it's not as if once you start, you're committed to that forever and a day, you've got the flexibility to do that. Obviously we say thinking about it as a five- year plus horizon, but you can get your money out with most stocks and shares ISAs without penalties. And that's another myth that once you start, you're not going to be able to get your money out for five years. You can, we just say, just be aware that if you take your money out and the stock market's down, that your value might have gone down at that point.

Iona Bain: Right. Yeah.

Paula Hughes: I think another myth as well is that you need to be almost like a wolf of Wall Street to know everything about investing. Again, that's not true. There are lots of guidance out there. There are funds that help you choose the risk you want to take, and this is the fund for you to support you along that journey. And finally, a really important myth that people have is the 20,000 pounds figure. It tends to get confused, I think, with value and contribution. So lots of people think, " I've already got 20,000 pounds in my ISA now. That's it. I can't pay into another ISA because I've hit the limit." The limit is the amount you put in. So your value of your ISA has nothing to do with that 20,000. It could go up and up and up infinitum. It's just the amount that you put in per tax year as opposed to the value.

Iona Bain: So this has been really enlightening. I think people will, if they're like me, want to go and have a cup of tea or a cup of coffee to think about what we've been discussing today. So whilst they wait for the kettle to boil, what is one thing that people can do to get started with their ISAs?

Paula Hughes: I would say the earlier you start, the better it is from that compound interest we said. So growth upon growth upon growth. And just get started. It's not complicated at all. You can start from as little as five pounds a month if you're looking at cash ISAs or maybe 20 pounds a month for stocks and shares. So get started. You can always stop. Take that first bold move.

Iona Bain: Couldn't have put it better myself. Paula, thank you so much.

Paula Hughes: Thank you.

Iona Bain: Well, that's all we've got time for today. I hope that that cleared up some of the myths around ISAs and inspired you to get stuck in. If you enjoyed this episode, why not share the podcast and help others get a little bit richer too?

Next time, we have a special two- part series all about investing, how to start, how to manage your emotions, and how to grow your money for the long- term with friend of the show, Emilie Bellet from The Wallet Podcast.

This podcast is brought to you by L&G. You can keep up with the show on YouTube, TikTok, and Instagram, @ legalandgeneral, where we'll be sharing clips and more tips from this conversation.

If you have a question or a topic that you would like answered on the show, then please do get in touch on our socials. We'd love to hear from you. Until next time, see you soon and thanks for listening and watching.