WHILE nearly three quarters of all ISAs are cash savings accounts, many experts believe that stocks and shares ISAs provide a better return for long-term investors.
Dame Helena Morrissey of Legal & General Investment Managers says that although a cash ISA offers a ‘small but secure regular return on your savings’, you may end up with less than you could get.
‘With inflation on the rise, cash ISAs may not be the place to go if you’re looking to do more with your money,’ she says.
The alternatives to cash include a stocks and shares ISA which, despite its name, does not restrict you to individual shares.
Instead you can invest in funds managed by experts as well as those that track indices like the FTSE 100 as well as corporate and government debt.
They also include the new Innovative Finance ISA (IFISA). With an IFISA you are lending your money to businesses or individuals, the returns can be much higher.
To give an example of the returns on an IFISA, the product offered by Funding Circle advertises rates between 5.5 per cent and 6.5 per cent.
With a stocks and shares ISA, the returns you get will vary depending on the performance of your investments.
Historic data suggests that, over time, most stocks and shares products do better than cash products, but there is a risk that you may not get back what you invested.
Similarly, with an IFISA, if the borrower cannot pay the money back you may not get back what you put in. Whether you should choose a cash or an investment ISA will depend on your risk tolerance as well as your timeframe. If you think you might need the money soon it is best to keep it in cash.
How to open an ISA
Opening an ISA should be simple. For those who want a cash ISA, try using moneyfacts.co.uk, which allows you to search for ISAs by rate.
The best rates are usually available where you lock your money away for several years. For example, you can receive 2.3 per cent interest on a five-year ISA from Shawbrook Bank. If you think you might need the money before then, or if you think rates might rise in the meantime, try an instant-access ISA. Paragon Bank is offering an instant access ISA at 1.45 per cent. Most cash ISAs allow you to apply online. If you want to transfer your money from old ISAs to a new provider, check that the new ISA you are opening allows transfers in. It is important that you do not withdraw money from your old ISA to deposit it in the new one; otherwise the money will lose its tax-free status. Instead, fill in a form from your new provider to transfer the money.
For stocks and shares ISAs, the platforms where you can host your ISA can be bewildering. Try the comparefundplatforms.com website to work out the best place to hold your investment ISA. Most platforms allow you to buy any combination of stocks, shares and funds you like within your ISA, and sell and buy whenever you like. But you don’t have to decide straight away. If you want more time to research the best place for your money, you can open one of these ISAs with a cash deposit and choose funds and shares at your leisure, says Laith Khalaf from Hargreaves Lansdown. ‘As far as the ISA allowance is concerned, it’s when you put the money into the tax shelter that’s important, not when you [later] invest it,’ he says.
First-time buyer or saving for retirement? There’s an ISA for you…
AS WELL as ordinary cash and stocks and shares ISAs, other ISAs with different rules have sprung up in recent years. Not everyone is eligible for every type of ISA, but some are beneficial for specific situations.
Junior ISA (JISA)
Like normal ISAs these can be in cash or stocks or shares, or you can contribute to one of each for each child under 18. If you are contributing to your child’s ISA this does not count within your £20,000 annual allowance, as each child has a separate £4,260 allowance (rising to £4,368 next tax year). A Junior ISA (JISA) becomes an adult ISA at 18, and can then be transferred to other adult ISA products. If your child has an old-style Child Trust Fund, this can also be transferred to a Junior ISA.
Innovative Finance ISA (IFISA)
You can transfer money from an existing ISA into an Innovative Finance ISA, which invests in crowd-funding or other peer-to-peer products, using the same process as described above for cash and stocks and shares products. Money in an IFISA counts towards your £20,000 a year allowance. As with a stocks and shares ISA, you may get back less than you put in with an IFISA.
Help to Buy ISA
These ISAs were designed to help people onto the property ladder, and can only be opened by those who have not already bought a first home. The government will add a 25 per cent bonus (up to a total of £3,000) to savings in one of these ISAs, and you can put in £200 a month, as well as a lump sum of £1,200 to start with. The money you put into a Help to Buy ISA counts towards your annual ISA allowance. These ISAs are being phased out in favour of Lifetime ISAs (see next column). The latest you can open one is November this year, and you can contribute until November 2029.
Lifetime ISAs are designed to save for retirement or a first property, and come with government bonuses. They can only be opened by those under 40. The government will add a 25 per cent bonus to your savings, up to a maximum of £1,000 per year, and you can put in £4,000 a year, which counts towards your £20,000 ISA allowance. You could also transfer money into a Lifetime ISA from any other ISA to get the bonus. Until the age of 60, the funds can only be transferred to buy a first property. After this, it can be withdrawn for any other purpose without losing the government bonus.
What you need to know
■ You have an ISA allowance of £20,000 which you can split between cash, stocks and shares, Innovative Finance and Lifetime or Help to Buy ISAs
■ You can open more than one ISA in a tax year, as long as you don’t breach the £20,000 limit, but you can only open one of each type of ISA each tax year
■ Your ISAs do not close at the end of the tax year. Instead, the money remains tax free while it is in an ISA account
■ You can transfer ISAs between providers and between different types of ISA, including transferring stocks and shares ISAs into cash ISAs, whenever you want. However you must not withdraw the money from the ISA to transfer it, but ask the provider to do so, otherwise the money will lose its tax-free status
■ If you submit a tax return, you do not have to include your ISA gains on it
■ You must save or invest by April 5, the end of the tax year, for your ISA subscription to count in that year’s allowance