What Are ISAs and Which Do I Want?

CASH ISA

WHAT

  • This is just a savings account. You put in money (up to £20,000 per tax year), and you get a rate of interest back in return.
  • The interest is paid to you tax free. Yay.
  • Downside, the interest rates you'll get are shite. Boo.
  • Right now you'll be getting around 1% per year.

HOW

  • You can open these with £1 and pay in £20k. Nowadays you can then withdraw that money during the year and stick it back in again later in the same tax year.
  • Whoever you bank with probably has a Cash ISA you can open, if not there are a shit load of them online that you can do. Minimal paperwork involved.

WHY

  • Quick to get access to, great place to save for short term spending (1 – 3 years), plus It’s always a sensible idea to have some cash savings tucked away for a rainy day. I would suggest anywhere from 3 – 6 months of your essential monthly expenditure is a good figure.
  • Gives you a lot of wiggle room and a big ass safety net in case your ass gets fired or something bad happens to you.

STOCKS & SHARES ISA

WHAT

  • Same £20,000 annual limit, but this time you get to buy shares in companies and other such fun shit. Think Tesla are going to do well in the future? Buy a small (teenie tiny) part of the company then and benefit if it does well!

  • You also get access to funds, which are where most of you will put your money. This can give you access to shit like Stock index (FTSE 100, S&P 500, etc), Government bonds, Corporate bonds, commodities, etc.
  • Basically, anything and everything.

HOW

  • Your high street bank will probably offer a Stocks & Shares ISA. It will most likely suck balls. Although Barclays used to be quite good from memory.
  • You’re better off opening an account with a specialist share trading company. I personally use Hargreaves Lansdown, but you can use whoever you like.
  • Charles Stanley, the Share Centre, Fidelity, AJ Bell, Interactive Investor – these all give you access to a shit load of funds.

WHY

  • This shouldn’t be money you’re going to need in the next 3 years. Investing in funds is a longer-term investment horizon than that. The longer the better generally.
  • The returns you can get are much better than a Cash ISA though. You’ll not only get an income from some funds – via a dividend, but you’ll also benefit if the share price of the company or underlying assets goes up in value.
  • If the economy does well, that means companies are doing well, which means shares prices are going up (dumbed the fuck down, but that’s about right). If you own shares in every single company in an economy, then chances are your investment will go up in value.
  • Using a S&S ISA allows you to do that. You can get as advanced as you like within a S&S ISA, buying individual shares and even gaining access to some leveraged funds (but that’s more advanced shit).

INNOVATIVE FINANCE ISA

WHAT

  • Similar to the Cash ISA in as much as you put your money somewhere and get a fixed rate of return back on it. However this time you’re going to get a half decent level of return.
  • Why? Because you’re lending to some random AF business or individual instead of a big ass bank. If you lend your money to HSBC, they probably aren’t going to fuck off with it and not pay you back. Some geezer who uses Peer to Peer lending on a website could well stop paying the money back. Oopsy doodles.
  • You can lend to individuals, businesses and on property assets. So it’s not all just some bloke, but it is all slightly dodgier risk. Think about it, if you’re a business and you need some money – go to your local bank and ask. If they say no, then you try the Peer to Peer people.
  • You’re basically lending to most banks knock backs. Which isn’t necessarily a bad thing, but it’s just something to be aware of.
  • For taking the risk, you get a higher rate of interest.

HOW

  • This is a very new type of ISA so there aren’t many people you can go to for this type of account. For an update list, go to - https://innovativefinanceisa.org.uk/isa-providers/
  • All you do is open an account with them, fund the account… then each platform varies. But generally you’ll select how long you want to lend for and what level of return (risk) you want.
  • You can start with as little as £10, but a lot ask for as much as £1,000 to open an account.

WHY

  • This is a new type of lending that cuts out the bank as a middleman. Right now it’s still a riskier proposition than lending to a bank, but I can see it getting more and more secure as it gets more established.
  • I would spread the money across a couple of different sites and would be looking for a return of at least 6%. You can expect that figure to drop due to bad debt and people defaulting.
  • It’s a fun way to spread your risk a bit and get a higher rate of return, but it’s not protected by the FSCS so if the company goes pop, you could lose everything. ☹ 

LIFETIME ISA

WHAT

  • A weird hybrid ISA that lets you save for a house or for retirement.
  • If you’re between 18 and 39, you can pay in £4k a year (and that comes off your £20k ISA allowance), but you can only use the money as a deposit for a house if you’re a first time buyer, or retirement once you hit 60.
  • The fun part is the fact the Government will give you a 25% bonus for everything you put in. So your £4k investment turns into £5k. Not a bad annual growth! You can continue paying into it until you hit 50.
  • So if you max out each year and you’re 30 now…. £20k bonus from the Government! Noice.

HOW

  • You can set up a Cash LISA for £1 with Skipton Building Society, but for a Stocks and Shares LISA you can go to most of the providers who deal with a normal S&S ISA.
  • AJ Bell, Hargreaves Lansdown, Share Centre, etc.
  • It’s a straightforward process, just fill out the forms and pay in the monies. 
  • If you’re definitely saving for a house, then the Cash ISA isn’t a bad option. If you’re thinking more long term, then the S&S is probably the one to go for.

WHY

  • First Time Buyers - If you’re saving for a house, it’s nice to get a bonus from the Government. You could use the Help to Buy ISA (I’ll cover that tomorrow) but with the LISA you can invest more, there’s no limit on the bonus the Government pays you, you can invest in Shares not just cash and you can pay in lump sums.
  • If you’re saving for retirement… bit more debatable. Probably a pension is still the better option, but it’s questionable whether pensions will still be around in 30 years’ time (which is all I care about cos I’m 35!).
  • If you can afford to save £20k a year anyway, then sticking £4k into a LISA is probably sensible. You can invest in the same shit you invest your S&S ISA anyway, so you’re just getting access to some money from the Government. Which is nice.
  • But be warned, if you pull the money out for anything other than your first house or retirement, you’ll lose the bonus and be hit with a 6% penalty. Sad times.

HELP TO BUY ISA

Can’t be arsed reading? Watch this instead.

WHAT

  • Only for first time buyers!
  • It’s a Government scheme to help you save up for your first house. Bit lower levels of savings with this one, £1200 upfront allowed, then £200 a month. Like the LISA they’ll give you a 25% bonus, but only once you hit £1600 and only when you use the money to buy a house.

HOW

  • Bunch of providers, mostly high street banks and building societies, so check your own bank first if you’re keen.

WHY

  • I reckon the LISA is a better option if you’re a first-time buyer to be honest. You can only invest in a deposit account getting you around 2 – 2.5% interest, which while better than most Cash ISAs, you can match within the LISA.
  • If you are saving for a house in the next 4 – 5 years though, it’s definitely worth considering!

Conclusion

What you decide to invest in is entirely up to you, and what’s right for you will be different for each person. What you need is a goal for your money and a definite action plan so you know where and how to invest to hit your target.

Personally, I like a simple Stocks and Shares ISA for most of my investing. £20k a year is a decent chunk to be saving, the rest of my money I tend to put into property.

I will probably / possibly start using part of my allocation for a LISA to save for my retirement. I don’t qualify as a first-time buyer, but £4k a year I can save confident in the knowledge I can leave it untouched for a few decades.

I already have an emergency fund of cash saved up, so I’m not arsed about having a cash ISA, and I’ve been burnt by Peer to Peer lending before, so I’m a bit biased against them nowadays. Probably unnecessarily, but whatever.