What is an ISA ?
What is an ISA? You may well have heard of one, you may well even have one, but perhaps you’re not entirely sure what one is. These days ISAs are everywhere and have been for some time. Over the years a lot of us have just accepted that ISAs just exist and they’re probably good for something- right? Whilst ISAs have maintained somewhat of an omnipresence over the years, many people are still blissfully ignorant as to what they do, and as to what benefits they can actually offer the everyday investor.
Let’s start with the basics. ISA stands for ‘individual savings account’- it does exactly what it says on the tin. It allows people to save their cash and earn tax-free interest. ISAs are offered by banks and building societies and provide investors with interest rates that are immune to taxation (unlike many other methods of investment).
There are a multitude of ISA types, each offering investors different benefits depending on their: age, saving aspirations and risk preference. The tax-year, which begins April 6th of every year, allows investors to invest up to their investment allowance. The tax year 2018/19 is £20,000.
Why do people use ISAs?
Offering a smorgasbord of different product types, ISAs grant you the flexibility of choice, with each different ISA catering to the different needs and requirements of each specific person. For a brief overview, we can say that ISAs:
- Allow you to transfer your plan between banks and platforms without losing any value from your existing ISA
- Status can be inherited by a spouse if something happened to you
- Have no age restrictions (besides Junior ISAs)
- Are often free of charge to set up
- Are tax efficient
Different types of ISA
There are many different types of ISA, each offering the investor different benefits depending on what the product is. So, if you’re one of many considering just ‘what is an ISA?’ Having a solid understanding of each ISA type and what they can bring to the table will certainly help you on your way.
1. Cash ISAs
A cash ISA is very similar to a traditional savings account. The key differences with a cash ISA is that there is a limit to the amount of cash you can transfer into your account and you don’t have to pay tax any interest you earn.
As with most things, it is always best to consider which ISA is best suited to your particular needs and how the benefits align to your specific needs. The great thing about ISAs is that they present a lot of choice, each lending itself to a specific type of individual.
2. Help to buy ISA
This relatively new ISA is aimed at first-time buyers and has been specifically designed to help get them on the property ladder. When the buyer contributes £200, the government will contribute a further £50 towards a deposit. The threshold goes up to a maximum of £3,000.
3. Lifetime ISA
A Lifetime ISA is a type of ISA that is available to those who are under 40-years old. This type of ISA can be used to save towards a house or something similar. You can also use leave the ISA to grow until the ripe age of 60, where you can then withdraw the money completely tax-free just in time for retirement.
4. Stocks and shares ISA
Similar to other ISAs stocks and shares ISA allows you to protect your capital gains from tax. Stocks and shares ISAs typically offer the possibility of a higher return but at the expense of a higher risk.
Stocks and shares ISAs allow the investor to invest into a range of different investments including government bonds, corporate bonds and trusts. Whilst this type of ISA could prove lucrative it could also go down in value.
5. Innovative Finance ISA
So now you’re up to speed with traditional ISAs, let’s get to grips with the world of alternative finance. If you’re one of many who before this article wondered ‘What is an ISA?’, then it ’s more than likely that you aren’t familiar with an Innovative Finance ISA. Prepare to be enlightened! A very modern ISA that came into being 2016, this new type of ISA allows people to invest their money into alternative finance platforms, such as P2P lenders. The interest rates offered by Innovative Finance ISAs are higher than the typical fare, usually in exchange for higher risk. Much like the other ISAs the standing limit is at £20,000 and allows for tax-free interest savings.
The platform you choose will be able to set up your account so that the interest paid by borrowers is kept within a tax-free ISA wrapper.
As of 2018 The House Crowd are now offering an Innovative Finance ISA. With a £20,000 tax-free investment allowance, you can earn interest on your capital without having to fork out any extra cash to cover tax payments. Much like our Auto-Invest service our IF-ISA is an automated investment product that automatically spreads your capital over a portfolio of peer to peer loans and development loans. By opting for The House Crowd to diversify all of your loans you no longer have to endure the hassle of managing your own portfolio, or any of the difficulties associated with it. You make the investment, we’ll do the hard work.
As with any investment product- including those from the banks- it is important to bear in mind that there is always an element of risk, and that your investment may go either up or down. For more information on risks visit our risk warning page.