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Nowadays, many people are looking for new solutions to put their savings aside or start investing tax-efficiently. In this scenario, ISAs are becoming more and more popular in the UK since they’re a new type of savings account which allow the holder to save or invest money in various fields, offering some tax benefits.
If you’re a neophyte and are questioning yourself, “what does ISA stand for?” or “how many types of ISAs are there?” or “how much can I put in an ISA?” keep reading. In this article, you’ll find the answers to the most frequently asked questions about the matter.
Things to keep in mind before opening an ISA
As mentioned above, ISAs are really common among UK residents, both seasoned investors and first-time investors. The acronym “ISA” means Individual Savings Account, a specific type of fund that works tax-efficiently, since the money saved or invested in an ISA isn’t subject to UK taxes.
There are different types of ISAs, and each one has been intended to meet the needs of a certain category of people. Some characteristics differ from one account to the others since every account – as we’ll learn later – serves a specific purpose.
However, all types of ISAs share the same ISA allowance, that is, the limit on the amount of money that can be saved within the tax-free wrapper in a year. This value is fixed at £20,000 for the current tax year (2022-2023) for all regular ISAs and £9,000 for Junior ISA.
All ISAs available for UK residents
ISAs come in different shapes, namely:
- Stocks and shares ISA
- Cash ISA
- Lifetime ISA
- Innovative Finance ISA
- Junior ISA
Stock and Shares ISA is the most common ISA among experienced and first-time investors. This specific account is designed to let you invest your savings in numerous assets, such as stocks, shares, bonds, and more.
Cash ISAs are also a common choice among first-time investors since it is indeed the most similar option to a regular savings account since you earn interest based on a percentage rate. However, it will grant you tax benefits. Cash ISAs have instant access, if you want to take out your money anytime you need, limited access when withdrawals are limited or a fixed rate if the interest do not change during time.
On the contrary, Lifetime ISA has been invented to help those aged 18-40 to save for life-related purchases, such the first house or for retirement. In this specific case, the annual allowance is set at £4,000 per tax year, and the government will give a 25% bonus up to a maximum of £1,000 per year.
Innovative Finance ISA is designed to let you earn tax-free interest on peer-to-peer lending. The interest rate is generally high, but you should consider that peer-to-peer investments are high-risk products since you have no guarantee if the borrower default.
Lastly, Junior ISA is an account specifically intended for parents (or legal guardians) who want to save or invest money for their underage children.
Which ISA should you choose?
Since the choice of ISAs is wide, you may feel uncertain if it’s your first investment approach. Therefore, you may consider relying on the help of financial advisors. Professionals may help and guide you on your new path by providing a clear overview of your options according to your needs, goals and risk tolerance.
Disclaimer: This article is not intended to be a recommendation. The author is not responsible for any resulting actions of the company during your trading/investing experience.
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