Do you know the different types of ISAs?
When it comes to where you save your money there are several options available. These include traditional savings accounts, national savings, pensions, OEICs and Unit Trust funds and Individual Savings Account (ISAs). Each will have a specific set of rules and benefits. This article will focus solely on the different types of ISAs.
There are two different types of ISAs available in the UK; a cash ISA and an investment ISA. Though the principle and general regulations are the same, each has different benefits, characteristics and each will serve different financial goals. Understanding the difference between the two types will help you make the best decision on which product is for you.
The easiest way to describe a cash ISA is that it is a tax-free saving account. Unlike a standard bank savings account which is subject to taxes on the interest gained, an ISA can appreciate in value without having to pay anything on the interest. A few of the key characteristics of cash ISAs are:
Low Risk Level
Since fund deposited are held in cash the capital is not affected by changes to the stock markets and offers a return based on the interest rate. Cash ISAs are usually with a bank or building society. Banks and building societies must be covered by the Financial Services Compensation Scheme (FSCS).
Cash ISAs often offer either a fixed or variable interest rate. Where a fixed rate gives you a clear figure on what you can gain in interest every month, a variable interest rate will fluctuate. How much it fluctuates depends on the Bank of England base rate and other changes in the market. Different ISAs will apply the interest to your account at different times. Some will apply interest annually, others monthly.
Cash ISAs can either be easy access or fixed rate. An easy access ISA means you can access some or all of your savings at any point. Some easy access ISAs have a notice period which specifies how much notice you must give in order to withdraw your savings. This can be up to 180 days. Fixed rate ISAs may have a maturity date which will specify when the fixed interest rate ends. Some will continue indefinitely. However, both types of fixed rate ISA will apply a penalty on early withdrawals. This penalty will normally take the form of losing a certain amount of interest on the withdrawal. For example; if you withdrew from an annual fixed rate account after 95 days, you would lose 270 days of interest.
It is important to understand the type of cash ISA you are saving into and how they operate. This information can be found in the ISA’s Key Features Document. It is also sensible to regularly review your Cash ISA to see if you can get a better savings rate elsewhere. Especially if the bank base rate increases, being mindful of any interest penalties that may apply should you transfer it to another provider.
Unlike a cash ISA, the money you deposit is held in investments, though it has the same benefit of being tax-free on any gains. Sometimes referred to as a Stocks and Shares ISA this option allows you to invest in a variety of products including mutual funds, stocks, bonds and exchange traded funds. Note: There is never any guarantee when investing, no matter what that investment is. Though stocks and shares ISAs do have the potential for higher returns, the risk level is also higher. A few of the characteristics of an investment ISA are:
Since this ISA is focused on investments rather than cash it is at the mercy of the market. You have the potential for high gains, but you also have the potential for loss. You could end up with less money than you started with.
It is important that when reviewing your options for an investment ISA that you find one that aligns with your risk appetite. If a higher risk ISA will lead to sleepless nights, then this might not be the right decision for you. Most underlying ISA investment funds will clearly note what the risk level is for the investment fund selected or the portfolio it holds.
To mitigate the potential for loss, investment ISAs often hold a wide range of different investments. When you spread your savings over different sectors and asset classes, you are not dependant on the performance of one specific thing. If one investment is having a bad day, the intention and hope is that another investment is having a good day. This is generally utilised when it comes to long-term savings goals.
With a diverse portfolio it is important that an investment ISA is carefully managed. This can be done by you, or by a qualified professional. Consistent review of what you are invested in, how it is performing now and how it could perform in the future should factor into whether you decide to keep your money where it is or invest in a different product. The intricacies of the market can see overwhelming, and if that is how you feel, working with a qualified financial advisor can increase your confidence and sense of security in your financial decisions.
Note: Past performance is no guarantee of future returns.
Seeking Expert Advice
ISAs are a solid form of investment as they are not subject to tax on the interest you gain or on the money you withdraw. Cash ISAs are great for the risk averse, provide flexibility on withdrawal and work well for short-term investment, with a defined savings goal. Though Investment ISAs come with a greater level of risk, with a diverse portfolio they offer the potential for higher returns and work well for long term investment goals. Often, investment ISAs are held for a minimum of 5 years.
The most important part of making the decision between which product is right for you is understanding both your financial goals and your appetite for risk. This is where Bigmore Associates can help.
With the guidance of one of our qualified financial advisors you will be able to direct your money to the savings product that is best suited for your life. We provide clear, fact-based road maps designed around your goals, needs and wants. Our expertise in both the financial market and customer relationship building sets us apart from other firms. Our passion for people and living a good life is what motivates us. Having the skills to align personal finances with personal goals is what makes us good at what we do.
For a free, no obligation, initial consultation fill out the contact form below. One of our financial services team will come back to you to set up a meeting and start you down the path of financial confidence and peace of mind.