Saving is tough at times, and finding the right financial product to do it effectively can differ from person to person. Plenty of factors shape your financial behavior and play a role in your decision. Are you saving for the long-term? Are you likely to need to pull money out from time to time? And, most importantly, how comfortable are you with risk?
The answers will define what types of accounts might work best for you. Basic savings accounts do nothing more than deposit occasional interest payments – typically reasonably modest amounts, circling around 1-2%. ISA, or individual savings accounts, are a little different. Designed specifically for certain goals of saving styles and often featuring tax-free gains, they can make your money work for you far more effectively than any standard savings account. But how do you figure out which ISA is right for you?
Stocks and Shares ISA
One of the two main forms of ISA, the SAS ISA is for those with a taste for investing. It’s effectively a portfolio, managed by your ISA provider in most cases (although some like Freetrade may even let you pick your own stocks), they allow you to deposit £20,000 per tax year. Anything over that is eligible for taxation. SAS ISAs are available only for those over 18 years old due to the investment risk factor, so it’s important to do your research on which Investment ISA you choose.
The ideal stocks and shares ISA should allow for things like transfers and withdrawals, with the provider offering some guidance or management. As a higher-risk form of saving, lacking these abilities and tools can pit you against a changeable stock market, even when it makes more sense to be more adventurous with your savings.
The other side of the coin, Cash ISAs are the most basic form of ISA. Available for 16-year-olds and up, they are simple savings accounts but with tax-free interest. As with a SAS ISA, you can deposit up to £20,000 with tax-free interest; anything after that can be taxed. It’s a great starter account for someone who wants low-risk savings, with no tax. Again, having the flexibility to transfer your cash ISA or make withdrawals is an added benefit so it’s important to check what your provider offers them before opening one.
The Lifetime ISA is a much longer-term option, designed to help you save for either a first home purchase or retirement. As of September 2022, you can open one if you’re between 18-39 and looking to buy a home worth less than £450,000 or retire after age 60. Currently, the deposit limit is £4000 a year, with the government adding 25% to anything you deposit, up to an additional £1000. Cumulatively, you can access up to £32,000 from the government, completely free, if you maximise your contributions to term. Until you turn 60, you can spend the money on a first house purchase, after which point you can access it as retirement savings. Although spending on anything other than a house before you’re 60 incurs a 25% tax on the whole amount from the government.
For under-18s, Junior ISAs let your parents pay in up to £4260 per year, after which the holder can access, and contribute to, the account at 16 years old and then finally start to withdraw at 18. A great headstart for those not old enough to start saving for themselves.
The good thing is you’re never ‘locked into’ most ISAs if your savings goals change over time. Transfers are possible in most cases. You’ve just got to follow the rules set out in them, and be clear with your ISA provider about your intention. ISAs are about commitment. They usually remove bonuses upon withdrawals, so it’s a decision not to take lightly. However, for those big life goals that we all hold, our first homes, retirement, our first forays into investing, ISAs are a fantastic gateway to get started contributing to them and avoid pesky taxation while you’re doing it.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.