ISAs or Individual Savings Accounts are a great way to help your money grow – plus, all the money is tax-free! Here’s a breakdown on ISAs
I know I’ve written quite a bit about saving tips, and smart ways to manage your money – and it doesn’t stop there (can you believe there’s more savings content?!).
You might have heard the term ISA being thrown around? Maybe at family dinners (with those dreaded “serious” family talks), or when you’re hanging around with your mates (and not downing a pint at the pub?!). I’ve got a few things to say about ISAs.
They’re a great way to save your money and help it grow!
ISA stands for Individual Savings Accounts, which as the name suggests, is just another way to save money. Simple enough right? Right. But how do they work? And what are all the different types of ISAs out there that actually help you save the way you want to and for the reasons you want to (no, not specifically for festival tickets).
So how do ISAs work? And why should you save your money in an ISA?
ISAs are a special type of savings account because they allow you to save tax-free! So the money growing in your ISA is all yours, nothing goes to the tax man.
And another great thing about ISAs?
So, for example, if you invest £1,000 in an ISA, and depending on the interest, you gain £200 (by not doing anything, it’s basically free money), making it a total of £1,200 – you don’t have to pay any tax on the £200 (you’ve probably already paid the tax for the initial £1,000 automatically through your employer).
When you earn a salary and are working under an employer, the money you get into your bank account every month is after-tax. Every month, the government takes a certain percentage of your income as income tax and how much income tax you pay depends on how much you earn. The higher the income, the higher the percentage the government takes from you – but ISAs are tax-free, which means the government can’t touch any growth in your money! Now you might be asking yourself – do I pay tax on my savings accounts? Yes, and how much you pay depends on your income tax percentage, so in reality, you only pay tax after your money has grown to a certain amount of interest every year. But there’s none of that with ISAs – completely tax-free no matter how much your money grows.
Sounds like a dream right? There is one catch (of course): you can only put in a certain amount of money every year, called your Annual ISA Allowance which means there is a limit to the growth in your money (although that’s quite a minor setback, because the allowance is pretty high). Your allowance resets every year on the 6th of April, so try and save up as much as you can to hit your allowance, because whatever you don’t use of your allowance, you lose for the next year! The more money you save before your reset date, the more potential your money has to grow.
What types of ISA can I save in?
There are three main types of ISA: Cash, Stocks and Shares and Lifetime ISAs. I’ve broken it down in more detail for you:
Cash ISAs: These are similar to other savings accounts you may have, and the growth in your money over the years is modest. Each Cash ISA has a set interest rate, and that’s the rate at which your money grows – so it’s safe and predictable (kind of like the Kardashians having a baby, you know).
Stocks and Shares ISA: This is kind of ISA is where you actually invest your money, so these ISAs come with a bit of risk (because you can technically lose what you invest) but potentially higher returns than with a Cash ISA. You can choose where to invest your money with a Stocks and Shares ISA (typically in various companies), and how much your cash grows really just depends on the market – which can be up or down, and a bit unpredictable (as unpredictable as the ending of The Departed). I know “investing” can seem like a daunting term, but it’s not as daunting as it may seem. Investing is just a term used for when you have the chance (yes, it’s a gamble) of getting more money back than you put in – kind of like a healthy version of a gamble actually. Plus, you can be as cautious with your money as you like. We’d recommend only considering a Stocks and Shares ISA if you’re thinking about investing long-term (over five years or more), because of the risk that your money could drop in value in the short-term. It’s a good idea to speak to your financial adviser about these types of ISA or talk to an ISA provider directly.
Some basic facts about ISAs: you need to be 16 or older to save in a Cash ISA, and 18 or older to invest in a Stocks and Shares ISA. You can have both a Cash, and a Stocks and Shares ISA if you like! But remember, your combined Annual ISA Allowance is £20,000 per year.
Lifetime ISA: A Lifetime ISA can be either a Cash ISA or a Stocks and Shares ISA, but the big bonus with these types of ISA’s is that the government will actually add 25% to your ISA pot each year. So, if you’ve saved up £2,000 in a year, the government will contribute £500 into your account (totally for free) and that adds to the growth in your money too! Again, the catch? You can only use the money in your Lifetime ISA towards either your first home or your retirement after 60 (we’re guessing you’re more interested in the house-buying side of things!). If you use your money for anything else, you face a penalty – so you’ve gotta be careful! Basic facts: you need to be between 18 and 40 years old to open one (sorry Boomers) and your Annual Lifetime ISA Allowance is £4,000 (which means you can get £1,000 of free money from the government).
If you’d like to open an ISA, there are loads of ISA providers out there or you can even speak to your financial adviser, family or friends to see which one you prefer. Want to get in on a little secret? There’s even ISAs that are climate-friendly and invest in companies that are working towards reducing their carbon footprint!
Anything else I need to keep in mind with ISAs?
You’re probably saving for exciting stuff like a house, or maybe a car or a holiday? But don’t forget to save for emergencies too. It’s not always great to think about worst case scenarios, but it’s important to consider them – what if you had an unexpected car or house repair you needed to spend on? Or what if you couldn’t work due to an illness or accident, and your income stopped coming in for a bit?
You could dip into your ISA savings, but it’s always a good idea to let them grow overtime untouched for the best returns. So, one of the ways you can leave your savings to grow in case of emergencies is through income protection insurance. It’s a financial product that basically replaces a percentage of your income if you can’t work due to illness or accident for as long as you need it – and it helps you to stay on track with your savings! Find out more about it here.
We've partnered with the experts at Caspian Insurance who can help you to find the right income protection insurance policy based on your personal needs. Click below to find out more.
Growing your money, investing or saving can seem like an impossible subject to approach, but in reality, there are loads of ways you can make your money work for you!
Just remember: the higher the risk, the higher the potential for your money to grow and vice versa. But with all these different ISA options, I’m sure you’ll find one that works for you (there should totally be a Buzzfeed quiz for what type of ISA you are).