ISA, Individual Savings Account

ISAs are one of my favourite financial schemes established by the UK government. ISA or Individual Savings Accounts are available to all UK residents from the age of 16 (in the Cash ISA format) and 18 for all investments focussed ISAs. ISAs are a way that UK residents are able to save or invest up to £20,000 annually without having to pay taxes on the proceeds (capital gains, dividend distributions, cash interest, and other taxable gains) maximising their returns.

The ISA program is entirely legal and aims to support and encourage UK residents to save and invest in the most efficient methods. ISAs can be opened in a range of different ways, from in high street banks like HSBC, through to more complex institutions such as stock brokers and credit unions. UK residents are able to open one of each ISA type, however contributions across accounts are still subject to the £20,000 annual limit. The four different ISA plans are listed below.

1. Cash ISA - This is arguably the simplest form of ISA, allowing users to save cash and earn interest without being taxed. This is a relatively stable option as the cash balance should only fall when withdrawals are made.

2. Stock and Shares ISA - This is the format I personally have the most experience with. Despite not appealing to all, the stock and shares ISA allows users to invest up to £20,000 annually in publicly listed companies. Stock or equity investments have a higher risk premium, meaning that while they can generate higher returns, the risk level of these returns is higher. This means that the owner can lose money within this ISA. Therefore, the age old saying ‘only invest that which you can afford to lose’ fits quite nicely here.

3. Innovative Finance ISA - Although these are not a personal strong point, Innovative Finance ISAs allow users to contribute up to the £20,000 annual deposit limit, this capital is then lent to borrowers in return for an agreed upon interest rate.

4. Lifetime ISA - The rules surrounding lifetime ISAs are fundamentally different, so I would recommend viewing this site for more information (https://www.gov.uk/lifetime-isa)

I understand that the idea of investing, stocks and shares, and interest can be daunting for people, especially those that have limited experience in finance. This is recognised by most banks and ISA offering institutions who will offer their own unique services, from educational materials to bank managed investments to support their customers upon request.