Which ISA is Right for You?
23.02.2018 by Jim Ker
With the new tax year upon us including a new £20,000 tax-free ISA saving allowance for the 2018/19 tax year, many people are considering where best to put their savings. When looking at ISA accounts, it’s important to understand the differences between products on the market so you can decide which fits your needs.
What is an ISA?
An Individual Savings Account (ISA) is a way to save money each year without paying any tax on the growth it generates. The Government sets maximum allowances that can be saved each year. This is set at £20,000 for the 2017/18 tax year.
In any tax year, you can elect to save your annual ISA allowance in:
- a Cash ISA
- a Stocks and Shares ISA
- an Innovative Finance ISA
- a lifetime ISA (up to a maximum of £4,000).
You can use a combination of these ISA types, up to your annual allowance.
UK residents over 16 can open a Cash ISA, but you must be over 18 to open a Stocks and Shares ISA or Innovative Finance ISA. Only Lifetime ISAs have a maximum age limit of between 18 and 40 years. Tax treatment of ISAs is set by the Government and may change in the future. Although there are 4 ISA types currently on the market, the majority still fall into one of two categories; Cash ISAs or Stocks and Shares ISAs.
What is a Cash ISA?
Cash ISAs are much like a savings account and are available from most high street banks and building societies. They are considered a safe, low risk savings choice and suitable if you need quick, short-term access to your cash. However, Cash ISA interest rates have been low for months now and with inflation seeing a 5 year high of 3.1% in November 2017, it could mean that the spending power of your savings is actually falling and that, in real terms, your savings are being eroded.
What is a Stocks and Shares ISA?
A Stocks and Shares ISA has a greater potential for growth over the longer term. So it is more likely to produce inflation beating returns than the cash alternative.
However, the possibility of better returns is not without risk and different options can offer different levels of risk. When investing in a Stocks and Shares ISA, investments can both rise and fall depending on the performance of the underlying fund, so you could potentially get back less than you original amount invested. As a result, you must make sure that you are comfortable with this risk before choosing a Stocks and Shares ISA.
When depositing money into a Tracker ISA you need to buy units, the value of which can fluctuate up and down depending on the performance of the underlying fund.
A With Profits fund operates slightly differently in that all members’ money is invested across a spread of different assets (cash, guilts & bonds, stocks and shares and property) – a proportion of the fund is invested in low risk assets to protect members’ initial investments, whilst an element is put into high risk assets to create growth. Any growth, or surplus, within the fund is shared fairly amongst the members.
At Kingston Unity, we believe in fairness and looking after our members’ money – this is why our Investment ISA invests in our With Profits fund which sits comfortably between low risk Cash ISAs and higher risk Stocks and Shares ISAs.