Let’s start with the basics – ISA stands for Individual Savings Account. That’s a good start, but what does it actually mean? And what does an account like this offer that’s any different from your normal bank account?
The main benefit of an ISA is that you can save or invest your money in one without paying tax on any interest or returns that you make. You can put in up to a certain limit each year without paying tax when you take your money out. And that’s why you’ll often see ISAs described as a ‘tax-efficient’ way to save for your future.
How much money can you put in an ISA?
The Government sets limits on how much you can save into ISAs each year. For the 2020/21 tax year the maximum you can save is £20,000, though some types of ISA have specific limits. You can find out more on our ISA rules page. Laws and tax rules can change and personal circumstances and where you live in the UK also have an impact on your tax treatment.
What are the different types of ISA?
There are different types of ISA available to suit different needs and goals.
There are Cash ISAs that give you some interest on what you save, generally at a set rate which isn’t subject to what’s happening in the markets.
There are also Stocks & Shares ISAs where your money is invested in funds and other types of investments to give it greater potential to grow, which might be worth considering while interest rates are low. But remember that because your money is invested, its value can go down as well as up and it could be worth less than what was paid in.
As well as Cash ISAs and Stocks & Shares ISAs there are ISAs that help you save towards your first home or for life after retirement, like the Lifetime ISA, and those that help you save for a child’s future, like the Junior ISA. You can read about them in more detail in our guide to different types of ISA to help you decide which may be right for you.
How many ISAs can you have?
You can have more than one ISA but you can only pay into one of each type in the same year. So, for example you can’t pay into two Stocks & Shares ISAs in a single year but you could pay into one Cash ISA and one Stocks & Shares ISA. If you’re considering this, there are a few important things you need to keep in mind. You can read more in our article How many ISAs can I have?
What’s the right type of ISA for me?
Each type of ISA will have its own features and pros and cons for you to think about. Our guide can help you decide which one is right for you when you’re ready to look at the options in more detail. But a good place to start is to consider whether a Cash ISA or Stocks & Shares ISA may suit your needs best.
Cash ISAs will usually allow you to access your money easily when you need it and there’s no investment risk because your money isn’t invested. You won’t pay any tax on any interest you earn.
Whether your money is saved in a Cash ISA or invested in a Stocks & Shares ISA, unless it’s growing quicker than the rate of inflation you’ll be able to buy less with it over the years. So it’s worth bearing in mind that with the Bank of England cutting interest rates to 0.1% this year, that’s actually lower than the current rate of inflation.
If you’re looking to save money over a short period, for example for a rainy day fund, a Cash ISA could be something for you to consider.
But if it’s more important to you that your money has the potential to grow more, and if you can save for the medium to long term – five years or more – you may want to consider a Stocks & Shares ISA. You need to be comfortable taking some investment risk because the value of your investments can go down as well as up and can be worth less than you paid in.
A Standard Life Stocks & Shares ISA offers both Easy and DIY investment options, so you can decide how involved you want to be in choosing and managing your investments.
If you think an ISA is right for you, the good news is that you still have time to make the most of your ISA allowance for this tax year. The new one doesn’t start until 6 April 2021 when you can start saving again with a new ISA allowance.
Open an ISA
The information here is based on our understanding in November 2020 and should not be regarded as financial advice.