What is an ISA?

ISAs are Individual Savings Accounts. They’re there simply to give you another tax-efficient way to save. They work because, unlike an ordinary savings account, you don’t pay tax on any growth in your investment.  So you get to keep more of your money.

It's worth noting that the favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation. The benefit of the tax treatment depends on individual circumstances.

What is an ISA for?

In a word, saving. You can use an ISA to save up for anything you want – whether it’s a new car, a big holiday, or simply to save for a rainy day. Many people also use ISAs as a way of saving for retirement.

ISAs explained 

There are a many types of ISA which include:

  • cash ISA
  • stocks and shares ISA
  • Lifetime ISA
  • Innovative Finance ISA
  • Help to buy ISA
  • Junior ISA

You can split your annual £20,000 ISA allowance any way you like between a stocks and shares ISA, a cash ISA, a Lifetime ISA and an innovative finance ISA. However, you can only pay a maximum of £4,000 into a Lifetime ISA per tax year, and you can only contribute to one of each type of ISA per tax year. Help to buy ISAs count as a type of cash ISA and the maximum that can be deposited in the year to a Help to buy ISA is £200 per month in addition to a £1,000 initial deposit on opening the account.

Since 6 April 2016 new rules mean that some ISA providers will let you take money out, then put it back in again in the same tax year without it using up some of your annual ISA allowance. These will be known as Flexible ISAs.

Cash ISA

A Cash ISA works in the same way as any other savings account – the big difference is, you don’t pay tax on the interest you earn. Different ISA products have different rules. For example, some give you instant access to your cash, while others expect you to keep your money in the account for a fixed time. 

Stocks and shares ISA

This type of ISA invests your cash in stocks and shares and other investment types.  This means, compared to a cash ISA, your money has a greater opportunity to grow, especially if you’re investing for the longer term.

However, the value of this type of ISA is directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invest.

What’s the best ISA for me? 

There are a few different things to think about. 

  • Cash ISAs are generally thought to be low risk, because your cash is tucked up in the bank rather than being invested in the stock market. So if you’re looking for a low-risk option that’s a positive. On the negative side, your money may not grow as much as it would with a stocks and shares ISA, especially if interest rates stay low.
  • Stocks and shares ISAs invest your savings in stocks and shares and other investment types, so there’s a greater chance your money will grow. But there’s also the risk that your investment could perform badly. That means you could get back less than you invested in the first place. 

Junior ISAs 

As well as the two main types of ISAs for adults, there’s a third kind of ISA which is just for children. Junior ISAs are a great way to save for your child’s future, whether that’s university fees, a first car or getting onto the property ladder. You can start saving into a junior ISA as soon as a child is born and they can’t get hold of the money until they’re 18. It’s a great way to build a little nest egg for the future.

ISA allowance

ISAs are ‘tax-efficient’: That means you get to keep hold of more of your cash, rather than handing some back to the tax man. But remember there are limits to how much you can save into an ISA. For 2018/19, the government made this allowance £20,000. That means you’re free to invest up to this amount in a Cash ISA, a Stocks and shares ISA or a combination of any of the ISA's mentioned above. There are some occasions where there are additional allowances available.

The allowance for children is lower – for a junior ISA you can save up to £4,260 a year for 2018/19. 

This information is based on our understanding of current, taxation law and HMRC practice, which may change.

Anything else I need to know? 

Setting up an ISA is simple. You can arrange your own, or you can ask an Independent Financial Advisor for some ISA advice. Alternatively contact Aegon Assist for guidance on setting up your ISA.  You can usually invest a lump sum, make regular payments, or do both.  

Saving for retirement

Most of us don’t want to work forever, so it’s important to plan and save for your retirement. ISAs are a great way to do this, but they’re not the only way. You could also invest in a personal pension, or have a combination of both – whatever works for you.