What are the Different Types of ISA?
What are the Different Types of ISA?
If you’re looking for an ISA, then it’s worth learning about the different types that exist. Different types of ISA are offered by banks, building societies or other platforms so that you can save your cash while earning tax-free interest.
The different types of ISA that you’re likely to come across include:
- Cash ISA
- Stocks and shares ISA
- Innovative Finance ISA
- Help to Buy ISA
- Lifetime ISA
- Junior ISA
If you’re one of the many wondering ‘what are the different types of ISA?’ and ‘which one should I use?’, then it’s important to get an understanding of how each of them works, as well as their advantages and their disadvantages. Let’s take a look.
A cash ISA is the most traditional type of ISA as it works in a similar way to a traditional savings account. The only real differences are that you don’t have to pay tax on the interest that you earn and there is a limit to the amount of cash you can transfer into your account in any given tax year.
Pros: All investments come with certain risks, but cash ISAs are generally considered the safest form of investment. It’s simple and popular – you save up to £20,000, earn interest and pay no tax on your returns.
Cons: At an average of 1%, the returns are very low. So low, in fact, that they could feasibly be wiped out by rising inflation. A cash ISA isn’t for anyone looking to make large returns on their investments.
Stocks and shares ISA
If you’re looking for a wide range of investment opportunities, you might be interested in a stocks and shares ISA. It allows you to invest in stocks and shares, including collective investments, government bonds and corporate bonds.
Pros: A stocks and shares ISA can offer great returns. If your chosen stocks and shares go up significantly, you’re in a good position.
Cons: Stocks and shares are unpredictable. They can be under or overvalued and the market can be volatile.
They’re also a medium to long-term investment and while there are normally no restrictions upon withdrawals they may not be suitable if you’re looking to access your money quickly. You might also have to
pay a money management fee, which can be expensive.
Innovative Finance ISA
The Innovative Finance ISA (IFISA) was only created in 2016. It allows you to invest money in peer to peer loans and the interest rates are usually significantly higher than cash ISAs. Minimum investments can start at as little as £10 (depending on your choice of platform), and allow for tax-free interest savings on up to £20,000 in any given tax year.
You can choose from a wide range of platforms (an IFISA can be based on different types of peer to peer loans, including property, consumer and business).
Pros: The main difference between the IFISA and other different types of ISA is that you are lending directly to a borrower. This means there isn’t a bank or building society in the way to manage the account or take a cut of your interest. This is part of the reason that IFISAs generally offer a much higher rate of interest than cash ISAs (for example, The House Crowd’s IFISA offers 7%* per annum).
IFISAs also grant you a bit more freedom by comparison to some other ISAs. Depending on the platform you choose, you can invest in different types of secured or unsecured loan.
Cons: Depending on the IFISA you choose, your funds may be inaccessible for a certain amount of time.
When you invest directly in people or businesses your capital is at a higher risk due to fluctuations in the market or economic performance, particularly when there isn’t a bank to monitor your investment. However, the platform you choose should provide reassurances on how they mitigate this risk. At The House Crowd, we have a strict due diligence process and monitoring system, while all investments are secured by the underlying value of the borrower’s property.
*Rate not guaranteed.
Help to Buy ISA
The Help to Buy ISA was introduced by the government to help get people on the property ladder. When a buyer contributes £200, the government contributes a further £50 towards a deposit. The threshold goes up to a maximum of £3,000.
Pros: The Help to Buy ISA is great for first time buyers. You can keep saving until 2029, can access your cash at any time (but if it’s before you buy a home you lose the government bonus) and, if you’re a couple, you can have one account each. Plus, you can use it on any kind of property, as long as it’s in the UK and bought for you to live in.
Cons: This is a very specific type of investment for first time buyers – not regular investors. To qualify for the account, you have to prove that you have never owned a home (or even a share of one) in the UK or anywhere else in the world.
If you’re under 40 years old and looking for a long term investment, you might be interested in a Lifetime ISA. You can leave your money to grow until you’re 60, when you can then withdraw the money completely tax-free.
Pros: There is a 25% bonus for everything you put in to your Lifetime ISA. For example, if you put in £4,000 (the yearly maximum) you’ll get £5,000 overall once you’ve claimed your government bonus.
Cons: The biggest drawback of the Lifetime ISA is that if you decide to withdraw your money before you turn 60, you incur a penalty of 25% taken off your overall savings – not just your bonus.
Only relevant to those wanting to save on behalf of children, a Junior ISA is a savings or investment plan for children under the age of 18.
Pros: Anyone can contribute to a Junior ISA (think grandparents and other family members) and the child can’t access the money until they’re 18, so it can be a great resource for when they become adults.
Cons: Of course, this is a very specific type of ISA and isn’t suitable for general investors. In addition, If the child has child trust fund (CTF), they can’t get a Junior ISA. This means that all children born between September 1, 2002 and January 3, 2011 (the dates when CTFs were introduced and then closed) are excluded.
Once the child turns 18 they become the legal owners of the Junior ISA which means that the parent or guardian who operated the account until then loses control of any decisions relating to the proceeds.
The House Crowd’s ISA
When considering an ISA, it’s important to remember that diversifying your portfolio will spread your risk.
The House Crowd’s Innovative Finance ISA (also known as a peer to peer lending ISA) automatically diversifies investments across a portfolio of secured peer to peer lending and property development opportunities.
It offers a £20,000 tax-free investment allowance and you can receive your interest payment twice a year. The minimum investment term is three years, and you can get started from just £1,000. Essentially, we make your money work harder, while you sit back and watch your investment grow.