Which type of ISA is right for you?

If you're looking to start saving for something big, be it a house, a wedding, or even to start a family, an Individual Savings Account (ISA) could be a good place to start. It's a savings account which has tax benefits, provided you don't go over the maximum amount. Here's a rundown of the six different types of ISA and how they could help you.

How do ISAs work?

Every tax year, you have a new ISA allowance. From 6 April 2019 to 5 April 2020, you can save up to £20,000 in ISA accounts. You can choose how you want to split this amount across cash ISAs, including the Lifetime ISA (maximum £4,000 per year), the Help to Buy ISA (maximum £3,400 per year), and junior ISAs, or stocks & shares ISAs and innovative finance ISAs.

Which ISA is right for me?

Cash ISAs

Cash ISAs are savings accounts where you don't pay any tax on the interest you earn. There are various types which offer different benefits, such as instant access to funds or fixed-rate deals. They typically offer lower interest rates than other types of ISAs.

An instant access Cash ISA might be right for you if:

  • You want to be able to withdraw savings

A fixed-rate Cash ISA might be right for you if:

  • You want to deposit money and save it for a fixed amount of time

Help to Buy ISA

This UK Government scheme helps first-time buyers save towards the cost of a home. You can pay in up to £1,200 in the first month of opening the account and then £200 a month after that. When you use these savings to buy an eligible UK property, the government contributes a 25 percent bonus up to a maximum of £3,000. You'll also earn tax-free interest on the money you save. There are various terms and conditions so do read up on the requirements before you apply.

This might be right for you if:

  • You're a first-time buyer
  • You need help getting on the property ladder
  • You don't want to contribute to a Cash ISA in the same tax year

Lifetime ISA

In a Lifetime ISA, the Government adds a 25 percent bonus on top of the amount you save. You can save up to £4,000 a year and you'll receive interest on top of those savings too. The money can be used either for your first home or for retirement – if you decide to use the cash for anything else, you'll be charged 25 percent of the amount you withdraw. You must be between 18 and 40 to open a Lifetime ISA, but you can save in it until you're 50. If you have both a Lifetime ISA and a Help to Buy ISA, you can only use the Government bonus from one towards a house. The Lifetime ISA benefit must then be used towards your retirement.

This might be right for you if:

  • You're a first-time buyer or you want to save for your retirement
  • You need help getting on the property ladder
  • You don't want to contribute to a Cash ISA in the same tax year

Stocks and Shares ISAs

With these savings accounts you can invest in funds, such as shares (stakes in a company) and bonds (loans to a company). While the interest rates are typically higher, so is the risk that the value of your investments will go down. As you could end up getting back less than you originally invested, these are not to be taken out lightly. The ISA is usually managed by an online organisation, which will sometimes charge fees for you to open and hold an account. Changing your investments or moving them to another company may also incur a fee.

This might be right for you if:

  • You're willing to invest over a longer term
  • You understand the risks involved

Innovative Finance ISA

An Innovative Finance ISA allows individuals to invest in peer-to-peer loans through an online portal. Peer-to-peer lending matches up investors with borrowers, who could be individuals, businesses, or property developers. With these savings accounts, you have the possibility to earn higher interest rates as you are cutting out the bank. However, with these types of investments there is a risk of losing your money.

This might be right for you if:

  • You want higher interest rates with riskier returns
  • You want to invest in a mixture of individuals, businesses and infrastructure projects
  • You're prepared to do your research into reliable companies

Junior ISAs

A Junior ISA is a tax-free way to save for your child. You can currently save up to £4,260 each tax year – this amount could change in the new financial year. Your child won't be able to touch the money until they reach 18 years old – then it becomes theirs as the account turns into an adult ISA. You can save in either a Junior cash ISA or Junior stocks and shares ISA – each works in a similar way to the accounts detailed above.

This might be right for you if:

  • You want to save for your child's future
  • You don't want to withdraw money from the account
  • You're happy for your child to have full control of the funds from their 18th birthday