The types of ISA you need to know about

Interested in setting up an ISA or just want to know more about the one you have? Our guide to the different types of ISA should give you all the information you need to make an informed decision

Pink balls with a single blue ball
(Image credit: Getty)

Whether it’s saving for your retirement, your children, a first home or the trip of a lifetime, ISAs (Individual Savings Accounts) are a straightforward and tax-efficient way to help achieve your financial goals. 

There are four main types to choose from: cash, stocks and shares (or Investment ISA), Innovative Finance or Lifetime ISA (LISA). There are also ISAs especially for kids. 

Everyone has a tax-free ISA allowance of £20,000 per tax year, which runs from 6 April to 5 April each year. Your allowance is renewed every year, so you lose what you don’t use. 

Here’s everything you need to know about the different options and how to save into the right one for you. 

Cash ISA

A cash ISA is essentially a basic savings account where you pay in cash and earn an interest rate on your savings. 

Interest rates are not very high at the moment, so shop around for the best possible one—compare rates at Moneyfacts, GoCompare or Moneysupermarket.

You can only pay into one cash ISA each tax year, although if you already have one, you can transfer it into one that pays a better interest rate without affecting this year's allowance—as long as you fill out the correct transfer forms. There are a number of different cash ISAs to choose from: 

Easy access ISAs—are a good home for your emergency savings pot— which should be around three to six months’ income. These allow you to withdraw your money when you need it without incurring a penalty, although some may restrict you to a set number of withdrawals a year, so do check.

Fixed-term ISAs—will pay a certain rate over a set period of time, typically one to five years.. They tend to offer higher rates than easy access but in return you have to lock your money up or face a penalty.

Flexible ISAs—will allow you to take money out and replace it during the same tax year, without that amount being deducted from your allowance. Most ISAs are flexible these days, but check with your provider and think first about how you plan to use the account before you open it. 

Stocks & Shares ISA

Stocks and shares ISAs, also known as investment ISAs, are a great way for people to dip their toes into the investing waters for the first time, although they are also a popular addition to the portfolios of even the most seasoned investors due to their tax-efficiency. 

As with a cash ISA, you can invest up to £20,000 a year and any investment gains you make will not be subject to the capital gains tax payable on other investments.

Similar to cooking a meal, you can choose to be very hands-on and pick all the investing ingredients yourself, or you can opt for a ready-meal and allow someone else to do the work for you.

If you’re saving for the long term (five years or more) then a stocks and shares ISA is a great option as it allows your money to grow by putting it to work in the stock market. 

It’s easy to get started with the best investing apps like MoneyBox, Wealthify or Nutmeg for example. If you’re happy to pick your own funds, take a look at providers such as AJ Bell, Fidelity, Interactive Investor or Hargreaves Lansdown

You can find a full list of providers at gov.uk.

You can only have one stocks and shares ISA per tax year, but it is possible to have a cash one, too, as long as you do not exceed your £20,000 annual allowance. So you can split it across both types if you wish. 

Lifetime ISA

The latest addition to the ISA family came in April 2017 with the dual aim of helping those under 40 get onto the property ladder or save for retirement. A maximum of £4,000 can be saved into a LISA each tax year until you are 50 and the government will give you a 25% bonus on top of whatever you put in up to a maximum of £1,000. You can only access the money at 60 or use it to buy your first property up to the value of £450,000, 12 months after you opened the account.

The Lifetime ISA comes in cash or stocks and shares versions, and which you choose depends on your financial goal and time frame. If you are saving for retirement or don’t plan to buy a house for many years, then the stocks and shares version makes more sense because you have longer in the market to ride out any falls and benefit from any gains. 

While the government bonus is a great incentive to open a LISA, bear in mind that if you use it for anything other than your first house or for a pension, you will be hit with a 25% withdrawal charge, which means you could end up with less than you put in.


You might also like...

What is inheritance tax? How to plan for you and your family 

Innovative Finance ISA

Another new member of the ISA family, Innovative Finance ISAs (IFISA) were introduced in 2016 to allow people to invest some or all of their £20,000 annual allowance in peer-to-peer lending within an ISA structure. Here you are lending your money directly to businesses and individuals without a middleman (such as a bank) in return for interest. 

These are considered the most risky ISA option, but the more risk you take the higher the potential returns. The loan element means you may have to wait to get your money out. 

It’s also worth noting that IFISAs are not protected by the Financial Services Compensation Scheme, meaning that you could lose your money or find it difficult to get it back should the company to which you have lent money go bust. 

Junior ISA

If you have children or grandchildren, you can save into a Junior ISA for them—this can be a cash or a stocks and shares one. The account has to be opened by a parent or guardian, but once an account has been set up, anyone can add money to it up to an allowance of £9,000 per tax year. Once again, any investment gains or interest earned is tax free.

The only caveat is that the money in the Junior ISA can only be accessed by the child when they are 18, at which point they can spend it as they choose. Make sure that, alongside the money you put into their account, you also deposit good financial habits into their growing brain.