Your guide to the different types of ISA
For beleaguered savers, arguably the last beacon of hope to be toppled was the Santander 123 account, which cut the interest offered on its flagship account from 3 per cent to 1.5 per cent (on balances up to £20,000) this past November. The fact that it still remains one of the leading rates available is, in itself, a further indictment on how barren the savings landscape has become. The base rate cut last August and expansion of quantitative easing has only compounded the situation. And with inflation set to soar to 3 per cent this year, nest eggs and rainy-day funds are effectively diminishing by the day in real terms.
Yet even though it may be tempting in such a climate to throw in the towel, and leave cash under the pillow, the truth is that it is more important than ever to be vigilant, and to get as much as you can from your money. ISAs, depending on your objectives, and your appetite for risk, can be a vital enabler in this regard, and it is thus good practice to have a sound understanding of what is available, and what the best ISA rates are.
There was a time not all that long ago when cash ISAs were a crowd favourite. After all, they are easy to use, easy to understand, and, prior to the recession, routinely offered interest rates in excess of 5 per cent. Those days feel like a distant memory now, and with the advent of the Personal Savings Allowance, the tax efficiency of a cash ISA becomes almost redundant for all except additional-rate taxpayers.
However, for those either in the additional-rate tax bracket, or with vast sums wrapped up, there are some cash ISAs out there offering returns which are vaguely respectable. Aldermore Bank has a two-year fix of 1.2 per cent (£1,000 minimum), while Paragon has a five-year fix of 1.6 per cent. As for easy-access cash ISAs, you can get around 1 per cent from a Virgin Money Defined Access ISA, an NS&I Direct ISA or a Saga ISA Saver.
The Lifetime ISA is a new brand of ISA which was one of George Osborne’s last ‘rabbits from the hat’ as Chancellor of the Exchequer, and will be launching at the commencement of the 2017/18 financial year. It is likely to arrive to much acclaim, given that it offers savers a considerable Government-funded bonus of 25 per cent; up to a maximum annual contribution of £4,000. That means you can earn up to £1,000 in ‘free money’ per year, and, given that you can add funds to the ISA up until the age of 50, you could theoretically get a boost to the tune of £32,000, excluding interest earned.
There are some restrictions to note. If you withdraw from your Lifetime ISA before the age of 60, you will be subject to penalties, and your bonus (and interest) will be forfeited – unless you withdraw to finance a first-time property, or to cover the costs of a terminal illness.
Still, the Lifetime ISA clearly carries tremendous appeal. Whether it should be a replacement for pensions, or a supplementary alternative, has stimulated heated debate. But it may just fit the bill for you.
The Help-to-Buy ISA is, in some ways, a microcosm of the Lifetime ISA, although it is only relevant for potential first-time buyers. As with the above, savers into this type of ISA are entitled to a State-sponsored 25 per cent bonus on their contributions; up to a total contribution of £12,000 (ie: £3,000 of so-called ‘free money’). The maximum initial deposit is £1,200, and thereafter the maximum monthly contribution is £200.
Again, there are a couple of restrictions worth noting. The bonus will only be applicable on homes valued at £250,000 or less (£450,000 in London). Also, the bonus cannot be put towards the deposit for your home, and will instead be included within funds consolidated at the completion of the property transaction.
That said, aside from the bonus, interest rates tend to be quite favourable on Help-to-Buy ISAs (Barclays offers rates of 2.27 per cent), which makes them ever more lucrative.
Stocks and Shares ISAs
If you’re happy to tie up your money for a longer term, and are content with the fact that the value of your investments can go down as well as up, then Stocks & Shares ISAs can offer superior returns over the long run. It is also a helpful means to protect dividends, which, for higher and additional-rate taxpayers, are taxable at a rate of 10 per cent.
Many different types of investment can be held within a Stocks & Shares ISA, including unit trusts, exchange traded funds, investment trusts, and individual stocks and shares. You can also make contributions into this wrapper in one lump sum, or on an ad hoc basis throughout the financial year. For further information, we’d suggest speaking to an independent financial adviser.
Innovative Finance ISAs
Of course, it’s our belief that the arrival of the new Innovative Finance ISA heralds the most exciting dawn for those looking to grow their money. Pickings are still pretty slim at present in terms of providers, given that Lending Works remains one of the only major platforms to be offering this new peer-to-peer lending ISA. Also, one must be cautious in making comparisons to other categories of ISA, given the differing risk profiles and lack of FSCS cover with respect to IFISAs.
However, if you’re after some of the best ISA rates on the market, which lack the volatility of stocks and shares, and are comfortable taking on an element of risk for this reward, the IFISA makes a strong case, and while diversification is key to any investment portfolio, we expect to see a considerable number of investors attribute the bulk of their ISA allowance to this new ISA category.