Life

Which ISA is right for you?

Whether you want to build a nest egg for your retirement, put down a deposit on your first home or save for your children’s future, there’s an ISA suited to your needs.

Deciding which ISA is right for you will depend on your financial goals, attitude towards risk and how long you’re planning to save or invest for.

You can put your full £20,000 allowance into one account or split it between different ISAs. If you’re not sure where to start, here are some of the best options for different saving strategies.

For low-risk short-term saving… consider a cash ISA

Putting your money in a cash ISA is a simple and safe option, although it isn’t going to give you big returns.

According to Bank of England figures from April 2018, cash ISAs earn 0.9% interest on average.[1]

With a cash ISA, savings of up to £85,000 are protected under the Financial Services Compensation Scheme should anything happen to your bank or building society. If you’re new to ISAs, cash can be a good place to start saving.

For medium-risk short-term saving… consider an Innovative Finance ISA

With this type of ISA, you lend money to others through peer-to-peer (P2P) lending and crowdfunding. Effectively, you’re playing the role of a bank.

P2P providers will offer you a fixed rate of interest, which you won’t have to pay tax on. This money is then loaned directly to vetted borrowers, who are expected to pay it back at a later date. You can get returns of up to 6%, although if borrowers default on their loan, you could lose your capital. Because of this, an Innovative Finance ISA is riskier than a cash ISA.

For saving for the long-term… consider a stocks and shares ISA

If you’re happy to tie up your money for at least five years and don’t mind taking a risk in return for potentially bigger rewards, you might like to consider investing in the stock market.

Before you begin, it’s important to evaluate your risk tolerance and try to build a balanced portfolio around this. Ideally, you should have a good mix of bonds, funds, shares and cash reserves to spread the risk. You can either pick your own investments or go for ready-made funds where the decision-making is done for you.

The stock market tends to outperform cash over time, although there are no guarantees that the value of your investments will go up.

For saving for your first home… consider a Lifetime ISA

If you’re saving up for a deposit for your first home, a Lifetime ISA can be a good option. It’s available to savers aged between 18 and 40, and you can pay in up to £4,000 per tax year.

The Government will top up any contributions by 25%, which means you could earn up to £1,000 of extra cash every year 

You don’t have to use a Lifetime ISA to buy a home – you can also use it to save for your retirement. In this case, you’ll have to wait until you’re 60 to access the money, unless there are exceptional circumstances.

For saving for your children… consider a Junior ISA

Parents can set up a tax-free savings account on behalf of their child. Although the annual allowance for a Junior ISA is lower than an adult ISA at £4,260, the interest rates offered are likely to be higher than other cash ISAs. If you’re willing to take more of a risk with your money, you can also open a stocks and shares Junior ISA in your child’s name.

A child can take over managing the account when they turn 16, but they can’t make any withdrawals until they’re 18.

[1] http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns.asp?Travel=NIxSCxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2018&TD=27&TM=Jun&TY=2018&VFD=Y&CSVF=TT&C=EMG&Filter=N&html.x=4&html.y=17 

 


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