This year sees the 20th birthday of one of the country’s most popular financial products. The Individual Savings Account (ISA) was launched back in 1999 with the then Chancellor, Gordon Brown, stating that ‘the aim of ISAs is to extend the savings habit to the half of the population that has little or no savings.’
ISAs remain hugely popular, with HMRC figures showing that £69 billion was subscribed to Adult ISAs in the tax year 2017/18 alone. The estimated Exchequer cost of the tax relief for ISAs in 2017/18 was around £2.9 billion.
As the ISA reaches the grand old age of 20, we look at the evolution of tax-efficient savings and look at the range of ISAs currently available.
A short history of the ISA
Back in 1999, consumers looking for tax-efficient investments had two choices. The Personal Equity Plan (PEP) allowed savers to invest in stocks and shares, while the Tax-Efficient Special Savings Account (TESSA) was a cash-based account in which savers built up a lump sum over five years.
In an attempt to make tax-efficient saving more accessible, the government introduced the ISA in 1999. Initially, the annual limit was just £7,000. Savers could either split their investment between a Cash and a Stocks and Shares ISA or invest the full £7,000 in the stock market.
Since then, the annual limit for ISA investment has increased, now standing at £20,000.
Your guide to the current ISA range
These days there are six types of ISA available.
Largely unchanged in the last two decades, the Cash ISA lets you save up to your annual allowance in a cash-based savings account.
All interest earned is tax-free, and there are hundreds of choices available including fixed and variable rates. You can only save into one active Cash ISA each tax year.
Stocks and Shares ISA
Also launched in 1999, the Stocks and Shares ISA lets you invest in a wide range of stock market funds and portfolios depending on your attitude to risk.
Your capital is at risk with this type of investment and your returns are based on stock market performance. You can save into a Stocks and Shares ISA as well as a Cash ISA in the same tax year up to the annual allowance. Profits made are free of Capital Gains Tax and dividends received on shares within ISAs are tax-free.
Innovative Finance ISA
Launched in 2016, the Innovative Finance ISA lets you invest in peer-to-peer (P2P) investments. P2P brings together people or businesses that want to lend money with those that want a loan, meaning it’s a way for borrowers to get funding without going to the banks.
An Innovative Finance ISA lets you take advantage of these opportunities while benefiting from the tax-efficient wrapper of an ISA. The annual limit applies, and your capital could be at risk if the money lent isn’t repaid. These ISAs are often riskier than most.
If you’re thinking of buying your first home, or you have children looking to get onto the property ladder, then the two following ISAs may be of interest.
Just two years old, the Lifetime ISA has two purposes: to help people to save the deposit for their first home and for their retirement.
Available to people aged 18 to 39, savers can put aside up to £4,000 a year and receive a 25% government bonus on their savings, paid monthly. There are penalties if a withdrawal is made before the age of 60 for any reason other than buying a home. Savers can hold a Lifetime ISA as well as other ISAs, and the annual limit applies across all ISAs.
Help to Buy ISA
Until November 2019, first-time buyers can save up to £1,200 initially and £200 per month in a Help to Buy ISA. A government bonus of 25% is also added to this type of ISA, paid when the saver buys their first home.
Savers can contribute to both a Lifetime ISA and a Help to Buy ISA, but the government bonus is only paid once. In research published by This Is Money in 2019, seven times more savers were choosing a Lifetime ISA over a Help to Buy ISA – perhaps due to a combination of the imminent closure of new Help to Buy ISAs and the added flexibility that a Lifetime ISA offers.
In the 2019/20 tax year, savers can invest up to £20,000 in a mixture of Cash, Stocks and Shares and Innovative Finance ISAs. For example, this tax year you could invest:
- £8,000 into a Cash ISA
- £8,000 into a Stocks and Shares ISA
- £4,000 into an Innovative Finance ISA
Note: you can’t pay into another Cash ISA in the same year you pay into a Help to Buy ISA.
In addition to these ‘adult’ ISAs, there is also the Junior ISA.
Junior ISAs are available to any child born after 3 January 2011. The current annual limit is £4,368 and savers can divide this between a Cash and Stocks and Shares ISA as they wish. A child can’t access the savings until the age of 18 and they can only hold a Cash or Stocks and Shares Junior ISA with one provider.
Time to review your ISAs or seek professional advice?
While ISAs have now been around for 20 years, and were designed to simplify tax-efficient saving, there is still much confusion surrounding these products.
A recent survey by Barclays found that seven in ten people didn’t know that the current ISA limit was £20,000, and 39% thought they would have to pay more tax if they chose a Stocks and Shares ISA than they would in a Cash ISA.
It’s clear that taking advice can help you to maximise your tax-free investment. It can also help you to get a better return on your savings.
According to This Is Money, two-fifths of cash ISAs are kept with the provider that savers use for their current account. On a £20,000 ISA balance, choosing a rate even 0.5% lower than the ‘best buy’ would cost you £100 a year.
While you can only pay money into one Cash ISA each tax year, you can transfer money already held in Cash ISAs between providers as much as you like. So, it can pay to regularly shop around for the best rate – but make sure you transfer your ISA rather than closing your account and investing the money elsewhere.
A financial planner or adviser can also help you to cut through the red tape to choose the best ISA for you. They will be able to look at your financial planning needs as a whole and make recommendations based on your needs and aspirations. One component of this may include comparing hundreds of different products using criteria such as charges and performance to find the most appropriate tax-efficient investment for you.
If you need any advice on your saving, investments or ISA allowances, contact us.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
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