Types of ISAs: Which is Right for You?

What are the various options available to an individual looking to invest through an ISA?

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Do you want to pay less tax on your investments? If so, an ISA could be the answer. There are lots of different types of ISAs that are suitable for different savers and investors.

It’s possible to invest up to £20,000 per tax year across a range of ISAs. The process of opening the various types of ISAs is relatively simple and often does not involve significant costs. This makes ISAs accessible to a wide range of savers and investors.

Here, we take a look at the different types of ISAs you should consider.

What types of ISAs are there?

There are lots of different types of ISAs:

  • Cash ISA – a simple type of cash savings account.
  • Stocks and shares ISA – a way to invest in stocks, shares or funds with no tax payable on capital growth.
  • Innovative Finance ISA – designed for investors to use to invest in peer-to-peer loans.
  • Lifetime ISA – a savings account that the government tops up with a 25% bonus.
  • Junior ISA – designed for parents who want to invest for their children.

Let’s break each one down.

Cash ISA

A cash ISA is one of the most popular and simplest types of ISA, and any interest income received within it is tax free. The Financial Services Compensation Scheme covers up to £85,000 of cash savings in a cash ISA.

Stocks and shares ISA

A stocks and shares ISA is another very popular type of ISA. That’s because a stocks and shares ISA offers a simple way to invest in a wide range of stocks. Amounts invested through these ISAs are not subject to capital gains tax or dividend tax. The cost of holding a stocks and shares ISA is typically relatively low.

A stocks and shares ISA could offer significant long-term return potential as shares tend to grow in value at a faster rate than cash savings over time.

Some people also use a stocks and shares ISA to save for retirement. However, don’t forget that traditional pensions still offer many advantages. You’ll get tax relief on contributions plus employer contributions if you pay into a workplace pension.

To learn more, check out our top stocks and shares ISAs in the UK.

Great for frequent investors or those who prefer funds

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Risk Warning Investments are complex and involve various risks, and you may get back less than you put in. Tax benefits depend on individual circumstances and tax rules, which could change.

The value of your investments can go down as well as up and you may not get back all the money you put in. All investments carry a varying degree of risk and it’s necessary for you to understand the nature of these risks. You should consider whether you understand how Stocks and Shares ISAs and Robo-Investing products work and whether you can afford to take the risk of losing money. Remember that taxes can be complicated and the tax benefits of these products depends on your personal circumstances. Tax rules are subject to change. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Click here to learn more

Trading Commission

£5.95 – £11.95

Account Management Fee

Up to 0.45%

  • Pros & Cons
  • Fees & Charges

Pros

  • Plenty of investing resources and research material
  • Cheap trading costs for active investors and free fund dealing
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Cons

  • Expensive fees for fewer trades
  • Structure of fees can be complicated
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Platform Fees:

Monthly subscription fee: £0

Equities custody charge: 0.45% (capped at £45/year)

Fund management charge

On the first £0 to £250,000 = 0.45%,
On the value between £250,000 to £1m = 0.25%,
On the value between £1m and £2m = 0.1%,
On the value over £2m = free

Dealing Fees:

UK shares & ETFs: £11.95 (for 0-9 trades in previous month), £8.95 (for 10-19 trades in previous month), £5.95 (for 20+ trades in previous month)

US shares & ETFs: £11.95 (for 0-9 trades in previous month), £8.95 (for 10-19 trades in previous month), £5.95 (for 20+ trades in previous month)

EU shares & ETFs: £11.95 (for 0-9 trades in previous month), £8.95 (for 10-19 trades in previous month), £5.95 (for 20+ trades in previous month)

Fund trades: £0

Spot + FX fees: 1%

Telephone dealing charge: 1% of trade value (£20 min/£50 max)

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Innovative finance ISA

An Innovative Finance ISA (IFISA) provides an opportunity for you to engage in peer-to-peer lending (where the capital is lent to private borrowers) and crowdfunding (where a project is funded through a large number of small contributions).

Although the returns on investments within an innovative finance ISA have the potential to be higher than those within a cash ISA, there is no protection from the Financial Services Compensation Scheme.

Furthermore, the price paid for crowdfunded investments may be relatively high – especially when compared with the price of listed company shares.

Lifetime ISA

A Lifetime ISA (LISA) can be opened by anyone over the age of 18 and under 40. Up to £4,000 can be invested in a LISA per year (which forms part of the £20,000 overall ISA allowance), and the government pays a bonus of 25% on all amounts invested. The government bonus can be worth up to £33,000 in an individual’s lifetime, since contributions can be made up to age 50.

Withdrawals can be made at any time to fund an individual’s first home purchase. Otherwise, any withdrawals before the age of 60 will incur a 25% penalty.

Lifetime ISAs are best suited to individuals who can invest their money over a long period.

Junior ISA

A Junior ISA (JISA) can be opened by a parent or legal guardian for a child under 18. The money can be invested in stocks and shares through an investment ISA, or can be held as cash by opening the ISA via a bank or building society. It is also possible to have a mixture of cash savings and stocks within a Junior ISA.

Up to £9,000 can be invested per year in a Junior ISA. The young person can take control of the Junior ISA from the age of 16 and can withdraw some or all of the money when they are 18.

Which type of ISA is right for you?

Identifying the type of ISA that is right for you is a personal decision. They all offer significant tax advantages.

Here’s a good rule of thumb based on the average person:

  • If you need the cash in your account soon, your best option is probably a cash ISA.
  • If you’re planning to invest over years, a stocks and shares ISA will likely give you the best returns.

The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.