Which ISA is Best for Me?
Thinking about which type of ISA best suits your needs? You can consider a number of factors
The Time Factor
How long do you need to save?
If you’re looking for a savings option that you can access in the short term, then a Cash ISA could be a good choice. 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.
If you are thinking of saving for the long-term (5 – 10 years), a Stocks & 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. Some Stocks & Shares ISA products also offer guaranteed returns after a longer period of time, so if you’re able to commit to the long-term requirements, you can weather stock market risk with the reassurance of a guaranteed return. However, it’s important to note that past performance is not a guarantee to future performance.
The Risk Factor
How Do You Feel About Risk?
Cash ISAs are considered to be a low-risk option – the likelihood of the value of your savings being reduced is low. However, the subsequent interest rates that you generally receive with a Cash ISA are also low. A Stocks & Shares ISA has a greater potential for growth over the long term than the cash alternative, but not without some risk. When investing in a Stocks & Shares ISA, investments can fall as well as rise depending on the performance of the underlying fund, so you could potentially get back less than you pay in. As a result, you must make sure that you are comfortable with this risk before choosing a Stocks & Shares ISA.
Different types of Stocks & Shares ISAs come with different degrees of risk. There are different types available on the market including Tracker ISAs and ISA products that save into a With Profits fund such as ours. These work slightly differently from each other and as such, the risk is again different.
It’s important that you clearly understand that your chosen ISA product is suitable for you before you invest. If you are unsure about which type of ISA is suitable for you, you should seek financial advice. You may be charged for this service.
The Family Factor
Who Are You Saving For?
Did you know that children under 18 also have an annual tax-free allowance that they can save into an ISA? The Government sets the maximum limit for investment into a Junior ISA within a tax year. This maximum limit can be split between a Cash and Stocks & Shares Junior ISA, or all paid into one. The maximum you can invest into a Junior ISA for the 2018/2019 tax year is £4,260. A Junior ISA is set up in the child’s name, so parents, friends and family can pay into a Junior ISA for a child and still make the most of their own annual tax-free allowance. Don’t forget though that the child is the account holder and only they can withdraw money from the account. The money becomes available to the holder on their 18th birthday.
If your child has a Child Trust Fund (CTF), you may transfer that into a Junior ISA. A child can only hold one CTF or an ISA. You can have a combination of a Stocks & Shares Junior ISA and Cash Junior ISA as long as you don’t go over the annual limit, but you cannot have both a Child Trust Fund and a Junior ISA. You can learn more about the Kingston Unity Friends and Family Junior ISA by clicking on the button below.
The Tax Factor
Understanding Your Allowance
For the 2018/2019 tax year, adults have an annual tax-free allowance of £20,000 and children have an annual tax-free allowance of £4,260. Both Cash and Stocks & Shares ISAs can be used to make the most of this tax-free allowance. There is a difference between the two though. With a Cash ISA, you will not pay any tax on the interest your ISA account is credited with. This is positive, but with interest rates being so low at the moment, the financial benefit is pretty poor.
With a Stocks & Shares ISA, your savings are free from both capital gains tax and tax on the interest that is credited. This means you will not pay tax on the interest you receive within the ISA allowance. It’s important to treat your own individual tax circumstances independently and be aware that tax law may change in the future.
It’s also useful to remember that you can hold one of each kind of ISA as long as you don’t go over the annual tax-free allowance. Many find this useful because it means you can spread your savings over different risk levels and reap the benefits of both products. Remember, if you don’t use your tax-free allowance for the year, you will lose it.
The Potential Benefits
Understanding What You Could Get Back
The overall aim of any ISA, Cash or Stocks & Shares, is to grow your long-term savings in a tax-free account. A key difference is the amount of potential return you could receive through your long-term savings efforts. This, of course, depends on the amount of risk you are willing to accept. If you are not comfortable and don’t understand the different risks that come with different kinds of ISA then read the above section on risk or seek financial advice before making a decision.
Currently, the returns on a Cash ISA continue to be low and the chances of these rates rising significantly in the near future are not looking high. The potential benefits of certain Stocks & Shares ISAs offer high returns, but with a hefty risk. An ISA that invests in a With Profits fund acts like a bit of an investment middle ground – low to medium risk with more consistent potential returns that are better than cash, but not as high as some of the riskier types of Stocks & Shares ISAs that are available. It’s all about balancing the risk with the reward and feeling comfortable with your investment.
Remember, there is no such thing as a risk-free ISA
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Important Information
A Kingston Unity Investment ISA invests in the Kingston Unity With Profits fund. Penalties apply on early surrender of the Investment ISA. Bonuses are not guaranteed but once they are added they cannot be removed.
Please make sure you read and retain the Investment ISA Product Guide, Terms & Conditions and Key Information Documents before applying for our Investment ISA as these documents contain the basis of the agreement between you and us. If you are having trouble accessing a copy of these documents or would like help completing your application, please contact us on 01924 240164. Kingston Unity does not provide advice. If you have any doubts on the suitability of our Investment ISA, you should seek independent financial advice. You may be charged for this service.
*Source: https://www.ons.gov.uk
