Individual Savings Accounts (Isas) are popular with the British public, and rightly so. They offer a straightforward, tax-efficient method of investing for your future. Pretty much every investor should have one.
But as is often the case, the popularity of Isas means that it’s hard for the government to leave them alone. It’s launched a whole series of twists on the original Isa, some of which are more useful than others.
The four different varieties of ‘other’ Isa
Yesterday we looked in detail at the original ‘adult’ Isa (now also known – confusingly – as the New Isa, or Nisa).
Today we look at the other main types of Isa available and ask which ones are worth considering and which you can safely ignore.
The Junior Isa (Jisa)
The Junior Isa is a tax wrapper that allows adults to save money on the behalf of a child. They’re available to the under-18s. Up to £4,080 a year (£4,128 from 6 April) can be contributed to them, and it can be invested in cash or shares (or other investments). Unlike the adult Isa, the money cannot be accessed until the child turns 18.
If you do have the wherewithal to contribute to them, Jisas are a potentially good option for saving for your child, but bear a couple of important things in mind.
Firstly, there’s no point on saving for your children if you are impoverishing yourself to do it (because they’ll be the ones who suffer the fallout if you can’t afford to turn on the central heating when you’re a pensioner). Make sure you are making sufficient provision for your own retirement before worrying about your kids’ savings. However, a Jisa does make a decent vehicle for financial gifts from generous grandparents or other relatives.
Secondly, with a Jisa, the child takes control of the money at 18. So they can do what they want with it. That may or may not be an issue – and it certainly gives you an incentive to have potentially tricky conversations about money with them – but do bear in mind that your co-operative eight-year old cherub may be a lot less inclined to use the money the way you’d prefer them to a decade from now.
The Innovative Finance Isa
Peer-to-peer (P2P) lending is an area of investment that has grown rapidly in recent years. Rather than borrow money from a bank, consumers and businesses use an online marketplace to borrow money from other individuals or institutions. The interest rates on offer are often appealing (although your capital is at risk if the borrower defaults on the loan), but the appeal has been dented somewhat for most investors by having to pay tax.
The Innovative Finance Isa allows investors to hold P2P loans in an Isa, and therefore avoid paying tax on any income (or capital gains) generated. It’s taken a while for the platforms to get fully regulated and get to a point where they’re ready to launch, but some are available on the market now. We’ll be looking at these in more detail, and highlighting the best options, in the MoneyWeek Isa supplement – sign up now so you don’t miss it.
My main point would be to remember always that these are loans rather than bank deposits, and so you can’t afford to look at the interest rate alone – you have to consider default risk and what sort of safeguards the platforms have in place.
The Help-to-Buy Isa
This was an attempt to subsidise struggling first-time buyers using taxpayers’ money. It’s being phased out in favour of the Lifetime Isa (see below).
The Lifetime Isa (Lisa)
We’ll be looking into the Lifetime Isa more tomorrow, but in brief, it’s available from 6 April and it’s being pitched as a more flexible alternative to a pension for the under-40s. You can save up to £4,000 a year into a Lisa, and the government will top it up with 25% (ie £1,000, if you save the whole lot).
You can access the money without penalty to buy your first house (up to £450,000), or once you’re over 60. But if you want it back before then, you’ll have to pay a 25% charge – so all of the government bonus, plus a bit more. Also, you can only save into it until you turn 50.
Will it replace the pension? Or is it yet another way to subsidise the already unhinged British housing market? And which providers will be offering them? We’ll take a look at these questions tomorrow.
PS We’re putting together our Isa special for MoneyWeek magazine right now. There are some great tips on how to make the most of all the different types of Isa, including specific investment ideas on funds to buy for this Isa season. Don’t miss it – subscribe now, and you could be a lot better off this time next year.