The ISA deadline is fast approaching, and gives investors until midnight on the 5th April 2021, the opportunity to save the maximum amount allowed for the 2020 to 2021 tax year.
The £20,000 limit can be distributed across multiple ISAs simultaneously, with different ISAs for different goals and risk appetites; from Stocks and Shares ISAs for learning investors, to the Help to Buy or Lifetime ISAs typically used by those aiming to purchase their first home.
What are ISAs?
For those who may not have heard of an Individual Savings Account (or ISA), these are relatively lucrative savings accounts which are tax-free! For those who invest the full amount of £20,000 this tax year, you will earn interest on the deposits which will not be subject to capital gains tax, or any other taxation.
What ISAs are Available to me?
At the time of writing this article, there are six different types of ISA that you can invest in:
- Cash ISA
- Stocks and Shares ISA
- Innovative Finance ISA
- Junior ISA
- Help to Buy ISA
- Lifetime ISA (LISA)
Should I Invest in the Cash ISA?
A Cash ISA is a fantastic savings product for individuals who have no discernible medium to long term goals, but are looking to improve the savings rates offered by typical savings accounts offered by standard bank accounts.
There are multiple options to choose from with a Cash ISA, such as Regular Saver, Instant Access and Fixed Rate, so assess your circumstances, and choose the one best for you.
The interest rate earned with a Cash ISA will not necessarily be the highest out of the six, but the flexibility of account types makes it very accessible.
In addition to this, any money invested up to £85,000 will be protected by the Financial Services Compensation Scheme (FSCS), so if the institution offering the ISA to you goes bankrupt, your savings will be protected up to this amount.
Best Cash ISAs 2021
- Scottish BS Cash ISA: 0.6% AER variable
- Charter Savings Bank Cash ISA: 0.56% AER variable
- Coventry BS Cash ISA: 0.4% AER
Should I Invest in the Stocks and Shares ISA?
These ISAs are typically higher risk for a higher potential return, so are usually invested in for those looking for a higher return on their money.
The great thing about Stocks and Shares ISA is that in addition to not paying capital gains tax on the increase in ISA value, any dividends paid out of investments in the ISA are also tax free (i.e. do not use up any dividend allowance).
Usually managed by a broker, or an investment platform or group, your savings will be invested in financial products such as stocks, bonds, or investment funds.
The inherent risk of the ISA means that you could end up having less than you invested, but the potential to earn more than the traditional Cash ISA is also there.
Investors in Stocks and Shares ISAs are usually looking to achieve their longer term ambitions, where investments grow your personal wealth to fund large potential costs later in life (such as paying for your child’s education).
If you are looking to save for five or more years, then the Stocks and Shares ISA would be best for you.
If you are looking for the best bang for your buck, find the broker or platform that offers the lowest fees.
Fees are usually a combination of:
Platform Charges (either a percentage of the potential amount to be saved, or a flat fee just for being on the platform)
Management Charges (a percent of the total amount invested)
Transaction Fees (for buying/selling assets)
Transfer Fees (for transferring the ISA to another provider)
Best Stocks and Shares ISAs 2021
- Freetrade: If you want to manage your own S&S ISA, Freetrade charges £3 a month, but with unlimited fee free transactions – you can get a free share worth up to £200 when you sign up using this link
- Interactive Investor Stocks and Shares ISA: A £9.99 a month payment for the “Investor Plan”, but then there is a £7.99 fixed fee per month for fund dealing meaning it can work out cheaper than other percentage based models
- iWeb Stocks and Shares ISA: One off Account Opening Fee (£100), with £5 per trade after that
Should I Invest in the Innovative Finance ISA?
If you are looking for a higher return than the Cash ISA, but are not interested in the traditional financial instruments such as stocks and bonds, then the ‘Peer-to-Peer’ lending feature of the Innovative ISA might be best for you.
Offering up to 7% in returns on the amount invested, there is the potential for a large gain for your savings (this is four times higher than the interest earned in the best Fixed Cash ISA).
It works by taking your deposits (and other investors’ deposits), pooling them, and then ‘crowd-funding’ young businesses that are looking for funding, but borrowers aren’t given money for nothing (so don’t worry about your money just being given out no strings attached).
The issues with this savings account is that you may be waiting for a while for your money to be invested if there is no suitable borrower (meaning 0% interest), and the interest rate earned when a suitable borrower is found is not defined when you open the savings account.
Best Innovative Finance ISAs 2021
- Ratesetter Innovative Finance ISA: £100 cashback for £1,000 invested, and had an average return of 4%.
- Funding Circle Innovative Finance ISA: Pays up to 7% interest, though is riskiest.
Should I Invest in the Junior ISA?
Given the name, the Junior ISA is not available for those who are 18 years or older.
If you are saving for your child’s future, then the Junior IRA is a useful way to invest up to £4,260 a year (so by 18, they could have nearly £80,000 in savings!)
When your child turns 18, the Junior ISA will convert to a Cash ISA.
If you child was born between September 2002, and 3rd January 2011, then your child is likely to have a Child Trust Fund as these were automatically opened by the Government (though since April 2015, these could be converted into the Junior ISA.
One thing to consider is that any money that is put away in a Junior ISA before your child is 18, will be locked away until they hit that milestone, so if your child might need access to the money earlier (e.g. school trips, first car & driving lessons etc.), then they will not be able to use this money.
Best Junior ISAs 2021
- Coventry Building Society Junior ISA: 2.95% AER variable
- Darlington Building Society Junior ISA: 2.5% AER variable
What About the Help to Buy, or Lifetime ISAs?
If you are looking to save for a deposit for a first time home purchase, then the Help to Buy or Lifetime ISAs will pay up to 25% in bonuses.
I covered these products in depth in my article here – please check it out for a more in depth guide about which ISA you should choose depending on your particular circumstances.
You will only be eligible for the 25% bonus depending on the amount you deposit each month, how long the accounts are open, and the final purchase price of your first time home purchase.
Best Help to Buy ISAs
- HSBC Help to Buy ISA: 1.75% AER variable (existing customers only)
- Newcastle Building Society Help to Buy ISA: 1.64% AER variable
Best Lifetime ISAs
- Moneybox Lifetime ISA: 1.1% AER variable
- Nottingham Building Society Lifetime ISA: 1.05% AER variable