This episode of the Your Recipe for Financial Success podcast was published on 14th January 2021. You can listen again by heading to our Episodes page, or on your favourite podcast player.

In this episode, Julie, Emma and Becky are serving up everything you need to know about ISAs. A tasty way to make the most of your savings.

Episode Highlights

First and foremost, you may be asking yourself, what exactly is an ISA?

  • ISA stands for Individual Savings Account. 
  • They are tax efficient savings.
  • Savers can pay up to £20,000 into an ISA account in this tax year (20/21)

What are the different types of ISA?

 

Cash ISA

  • Cash ISAs can usually be opened through your bank/building society
  • They are relatively safe however savers should be mindful of the effects of inflation on their savings over long periods of time
  • You must be over 16 y/old to open a Cash ISA.

Stocks and Shares ISA

  • Stocks and Shares ISAs should be considered as a medium to long term investment
  • You can hold funds and sometimes shares in companies
  • You must be over 18 years old to open a Stocks and Shares ISA.

Innovative finance ISA

  • Innovative Finance ISAs use peer to peer lending platforms. So, put simply, your ISA investment will be passed on to another person who is looking to borrow money.
  • It’s important to bear in mind that these types of ISA are not protected by FSCS.

JISA (Junior Individual Savings Account)

  • This type of ISA can be opened by a parent or guardian of a child under the age of 16.
  • A JISA can be held in cash or as stocks and shares.
  • The savings limit for the 20/21 tax year is £9,000 per child.

Help to Buy ISA

  • These ISAs are no longer available to new savers, they were designed to help savers buy their first home
  • When you were ready to buy your first home, the government would then add a 25% bonus (up to £3,000) to your savings.

LISA (Lifetime ISA)

  • You can pay a maximum of £4,000 in any one tax year into a LISA
  • You must be between the age of 18 and 39 to open a LISA
  • The money in your LISA must be used either for retirement (from age 60) or to buy your first home
  • The Government adds a 25% bonus to your contributions paid in at the end of each tax year
  • There may be a charge of 25% to withdraw money for use for any other reason than for your retirement or buying your first home.

If learning all about ISAs has got your stomach rumbling for more financial recipes, check out our other podcasts on our episodes page. Don’t forget about our Facebook page too where you can ask questions and join in discussions about all of our topics!

 

Rediscover the conversation

Julie Hunt 
So guys, what have you been up to this week?

 

Emma Knights 
Well I don’t know about you but I’m chilling out on the new beanbags.

 

Becky Campion 
They are so comfortable I love them!

 

Julie Hunt 
Especially after a glass of Prosecco. Are you sure I’m not slurring my words?

 

Becky Campion 
No, I’m not sure that you’re not in all honesty!

 

Emma Knights 
I think we’ve made one mistake though,

 

Becky Campion 
What’s that?

 

Emma Knights
There are only two beanbags!

 

Becky Campion 
Yeah that’s awkward isn’t it?!

 

Julie Hunt 
I thought you could sit on the floor Emma!

 

Emma Knights 
Well what you two are going to do when I’m sitting on one and got my feet up on the other?

 

Julie Hunt 
Well that would mean we need six beanbags and not three!

 

Emma Knights 
So what are we talking about this week?

 

Becky Campion 
So, in this week’s episode, we are icing our ISAs!

 

Julie Hunt 
Emma give us some stats about ISA’s, let’s get started!

 

Emma Knights 
In 2017/2018, there were 10 million people in the UK who had an ISA. That figure actually went up the following year so now, 11 million people have them.

 

Julie Hunt
That’s quite a high percentage of the population!

 

Emma Knights
It is and it’s interesting that more people are starting to use them. The other thing that I found quite interesting is 2.2 million of those 11 million people have a stocks and shares ISA – that’s only 3%. I thought that was quite low, what about you?

 

Becky Campion 
It is quite low when you think 10 million people have ISAs and of them, only 3% them are stocks and shares. When you look at it like that you think oh, that’s not many at all is it?

 

Julie Hunt 
It is quite low. Why don’t we explain to our listeners what an ISA actually is?

 

Emma Knights 
Of course, so for those of you that don’t know, ISA stands for Individual Savings Account.

It might sound obvious, but not to some, you can only have an ISA in one name. You can’t have it in joint names because, after all, it is an Individual Savings Account.

There’s a limit to how much you can pay into your ISA, and for the current tax year it’s £20,000. That’s for an adult’s ISA. For a junior ISA, you can pay £9000 in in this tax year. There are some different ISAs which have different limits, but we’re going to cover them in a little bit more detail later on. I’m just going to leave it a little bit generic at the moment.

Generally you can have an ISA from the age of 16, but again, there’s some caveats on that too so I’ll tell you more about those later on.

 

Julie Hunt 
So, how many different types of ISAs are there?

 

Emma Knights 
Why don’t you have a guess and tell me how many you think there are?

 

Becky Campion 
Let me think, because there are some weird and wonderful ones. Off the top of my head I’m going to say six!

 

Emma Knights 
Oh, close.

 

Julie Hunt 
I’d go for five because there is lots of different ones. I just can’t remember which ones are still going and which ones aren’t.

 

Emma Knights
I just realised I said close a second ago but Becky was actually right with six!

 

Julie Hunt
Oh well done Becky. Let’s get the Prosecco back out!

 

Emma Knights
Yeah, sorry should have been paying attention there!

 

Julie Hunt 
Did you have an extra glass of Prosecco too Emma?

 

Emma Knights 
Ssssshhhhh, you weren’t meant to figure that out but obviously my counting skills have given me away so I do apologise!

 

Julie Hunt
Thank goodness you don’t work in financial services!

 

Emma Knights 
This is very true.  So, there are six different types of ISA. Do either of you know what the main two types are?

 

Julie Hunt
I would go for a cash ISA first?

 

Becky Campion 
And the other would be stocks and shares?

 

Emma Knights 
You would both be right! Those are the two most common types of ISA.

So I’m going to start off by telling you about cash ISAs. With the cash ISA, you can have them from the age of 16, think of a cash ISA as a normal savings account. The only difference really being that you’re not going to be taxed on any of the interest that you earn. You can normally get a cash ISA with a bank or building society, and they’re pretty secure. Obviously you’ve got your Financial Services Compensation Scheme, that we’ve talked about before, in case anything happens.

You’re given a set rate of interest that that you know you’re going to be getting. But bear in mind, the interest rates, particularly on instant ISAs or any instant access bank account at the moment, are quite low. At the moment, rates start at around about 0.01%.

 

Becky Campion 
Ouch that is really low.

 

Emma Knights 
Yeah, think of a penny for every £100 you’ve got saved, how do you feel about that?

 

Becky Campion 
Not that excited about that!

 

Emma Knights 
No. So that’s why people often look for alternatives where they may be able to make a little bit more money.

People often choose to use a stocks and shares ISA instead. This is where you can invest in different funds or shares. Funds and shares are something we’re going to talk about in a future episode so I’m not going to go into too much detail about those now.

So, if you’re 16 for a cash ISA, how old do you think you have to be for a stocks and shares ISA?

 

Becky Campion 
I know this one, it is 18!

 

Emma Knights
It is!  From the age of 18 you can have a stocks and shares ISA and these should be viewed as a medium to long term investment.

If you’re thinking you might need your money out in the short term or might need to get hold of it soon, I wouldn’t suggest putting your money into a stocks and shares ISA. A cash ISA is going to be better if you need the money for the short term.

If you’re looking for something longer term and you’re prepared that it may rise and fall in value over time, a stocks and shares ISA could be a good option to look at.

 

Julie Hunt 
Oh, okay. So they’re the two main options. There are four more, do you want to tell us about those Emma?

 

Emma Knights
There are, so these are where ISAs start getting a little bit more weird and wonderful! The next one I’m going to talk to you about is a Lifetime ISA.

 

Julie Hunt 
I think I heard about these and I was too old to get one.

 

Emma Knights
You’ve given away your age to people out there Julie. To have a Lifetime ISA you need to be between the ages of 18 and 39.

 

Becky Campion
So anyone can have a guess at how old Julie is from that. Be kind, is all I’m going to say!

 

Julie Hunt
I’m 17!

 

Emma Knights 
The maximum you can put into these ISAs each year is £4,000 so that is part of your overall £20,000 allowance.

What happens is the government add a 25% bonus at the end of each tax year. However for you to use this money, it has to be towards buying your first home or for your retirement. The government will continue to pay that bonus, up until you reach the age of 50. You can then take the savings from this ISA at the age of 60, or if you’re specifically using it to buy your first property.

There is that nice bonus from the government that you can take advantage of by using a Lifetime ISA.

 

Julie Hunt 
You can see why I wanted one!

 

Emma Knights 
I can definitely, and I can see why lots of people would! Who doesn’t like a bonus from the government?!

 

Becky Campion
What’s the catch then?

 

Emma Knights 
Well, the catch is that you can only use it for a first home or for your retirement, you can’t just take it out in between for anything else you fancy!

 

Julie Hunt 
So you can’t go on holiday with it Becky.

 

Becky Campion 
So, if I wanted to take it out, there wouldn’t be any penalties?

 

Emma Knights 
Yeah, they’re actually would be!

 

Becky Campion 
Well I never did!

 

Emma Knights 
Alright, Becky you caught me out there, you are too far ahead of me!

If you want to access your money you can, but that holiday is going to end up being a lot more expensive because there’s a penalty that applies of 25%, which is effectively your nice bonus from the government taken away.

So, if you access money in the account for any other reason you’re going to lose that amount which would defeat the point of having the ISA in the first place. There is a bonus though that the government is giving you up until April 2021, so for a short period of time, they’ve reduced that penalty to 20%, because they understand that some people may need to access their money during the pandemic.

 

Julie Hunt 
That’s a pretty good option to be fair.

 

Emma Knights 
Pretty good indeed.

 

Julie Hunt
So what’s the next one on your list, Emma?

 

Emma Knights 
So, this one’s a bit of a trick really, I’m going to tell you about it but with the caveat you can’t actually go out and get one if you haven’t already got one.

 

Becky Campion 
Ahh just dangle a carrot in front of us then!

 

Julie Hunt 
Is it because I’m too old or is it because they just aren’t available any more?

 

Emma Knights 
No you’re not too old for this one, they’re just not available anymore. I’m going to be a bit smarmy here, I have one of these!

So, this one is a help to buy ISA. Like I said, they’re no longer available, but what they were designed for is to help you to be able to buy your first home.

You could put a maximum sum in to start of £1,200, and then £200 per month regular savings can then go into the Help to Buy ISA. Then the government, when you choose to buy your house, will add a 25% bonus to the savings that you have made, up to a maximum of £3,000.

Again, I’m not going to go into too much detail, especially as you can’t actually apply for one now, but depending on where in the country you live depends on the value of the home that you can buy as well.

 

Julie Hunt 
That one sounds a lot more complicated to be fair.

 

Emma Knights

It is a little bit, but again, if it’s something you’ve already got you probably took it out for a reason. So hopefully you’ll know a little bit about it already.

 

Julie Hunt
Okay, so that’s number four! What’s number five?

 

Emma Knights 
Number five is what we call an Innovative Finance ISA. An Innovative Finance ISA invests in what we call peer to peer lending instead of cash or funds.

 

Becky Campion 
You’re going to have to tell us what peer to peer lending is first!

 

Emma Knights 
Indeed, I’ll tell you a little bit just so you have an idea of what it is. Peer to peer lending, is where lenders and borrowers are matched together using a website. So rather than someone going to the bank because they need to borrow some money, you can do it through a third party website which matches people together.

So, basically using peer to peer lending cuts out the middleman. It can make the rates better. The difference being, as I mentioned earlier about the Financial Services Compensation Scheme (with ISAs in building societies being part of it), an Innovative Finance ISA isn’t protected by the FSCS so that’s just something to be aware of.

 

Julie Hunt 
Emma can I ask you a question? If I had £20,000 and had £10,000 in my stocks and shares ISA, £5000 in my cash ISA, could I also have £5000 in an Innovative Finance ISA too? Is that correct. So what is the sixth type of ISA?

 

Emma Knights
The sixth and last type of ISA is what we call a Junior ISA or a JISA. A parent or guardian can open a JISA for a child until their 16th birthday. The money is kept in the ISA until they reach the age of 18, and the JISA can be held in either cash or stocks and shares, you have the choice.

The limit to pay into these is a little bit different so you can’t pay £20,000 in in a tax year, the limit on these is actually £9000 per tax year.

Julie Hunt
Am I correct in saying that these replaced the Children’s Trust Funds?

 

Emma Knights
Yes, so these replaced Child Trust Funds so if you’ve got a Child Trust Fund, you could transfer it into a JISA if you wanted to, but you can’t transfer from a Junior ISA into a Child Trust Fund because they’re no longer available.

 

Julie Hunt 
That’s great, thanks for explaining that one.

 

Emma Knights 
I’ll answer another question that often comes up. People often ask if you can have more than one ISA, and as financial advisors, we like to be difficult and like to give you a ‘yes you can, but it’s not quite as straightforward as that’.

You can have more than one ISA but you can only pay into one cash ISA and one stocks and shares ISA in any one tax year. You can’t be paying into two different cash ISAs in one year.

Say you have one that you opened five years ago and you haven’t paid into it for ages. You can open another one, and pay into that one so you still physically have two cash ISAs, as long as you’re only putting money into one of them.

 

Becky Campion 
That makes sense.

 

Julie Hunt 
Why would you go for an ISA over any other savings account?

 

Emma Knights 
The main difference between an ISA and any other savings account is the tax benefits of it. Any interest that you earn in your ISA is tax free.

If you have a stocks and shares ISA, whereas on a normal investment there may be capital gains tax and dividend tax, on ISAs you don’t get either of those taxes because it is all completely tax free.

 

Becky Campion 
Excellent. Sounds like a good bonus.

 

Emma Knights
Everybody loves a bit of a tax free investment, don’t they?!

 

Becky Campion
They certainly do. So, how can our listeners who are interested in an ISA account apply for one?

 

Emma Knights 
You can go to your bank or building society, and you can probably even open one online, most banks offer that option now. If not, there may be the option to open one in branch or over the phone.

There are also comparison websites which you can use to compare interest rates.

 

Becky Campion 
So, say I have my ISA and I decide I actually want to use the money to buy a new car, for example, would I have to pay any charges or fees to withdraw the money?

 

Emma Knights
As long as you haven’t used the Help to Buy ISA or the Lifetime ISA that I talked about, you can use your money in your ISA for anything you like.

You need to bear in mind what the access is on the ISA though as they all have different options. It could be an instant access ISA which means you can get your money out immediately. Some ISAs have a notice period. Some of them might even be a fixed term account so if you want to take your money out before the term is over, then there would be a penalty.

Before you put your money into an ISA look at the withdrawal terms to make sure that you’re going to be able to do what you want to be able to do in future.

The other thing to remember is a Stocks and Shares ISA is intended to be a medium to long term investment. If you’re putting money in this week and thinking you might be need it out next week, though you can probably get it out, it might not be the same value as you initially put in because a stocks and shares ISA will rise and fall in value over time.

 

Becky Campion 
Very good point.

 

Julie Hunt 
I’ve heard about this thing called a Flexible ISA, you haven’t mentioned that yet in any of your six types of ISA, what is one of those?

 

Emma Knights 
A Flexible ISA can be either cash or stocks and shares and there aren’t a huge number of providers who offer them at the moment. They are quite a unique thing still but they’re very good.

What a Flexible ISA means is that if Becky needed to take her money out to buy a car, she can get that money out. But she can then pay that money back in, in the same tax year. Normally if you have an ICER and you pay in £20,000 and you take £1000 out, it typically would mean that you’ve just lost £1000 of that year’s allowance because you’ve taken it out and it can’t be paid back in.

With the Flexible ISA, it allows you to replace that money in the same tax year so you can take full advantage of your allowances.

 

Becky Campion
Hmm I’m trying to think of an example here. So, going back to my car example, using a Flexible ISA I could withdraw the money and happily go and buy my new car, then say I sell my old car two months down the line, in the same tax year, I could re-pay that money back into my ISA without using any of my ISA allowance?

 

Emma Knights 
Yes, as long as it was in the same tax year.

 

Becky Campion
Perfect. So what happens to my ISA account if I died?

 

Emma Knights 
Oh, it’s not a very joyful question there Becky!

 

Julie Hunt 
Gone from buying a car to dying!

 

Emma Knights 
Well it happens to all of us! If you have a spouse, you can leave your ISA to them, using what we call the additional permitted subscription. Wow. There’s another one you need to put your teeth in for!

 

Julie Hunt 
What is the additional permitted subscription then?

 

Emma Knights 
It can be used for anyone who has died since the 3rd December 2014, what it means is that your spouse inherits your ISA and your allowance. So if you died Becky and you had £5000 in an ISA, your husband’s allowance for his ISA would increase by £5000 because of your additional permitted subscription.

 

Becky Campion 
Well I hope that me being alive would be more of a benefit to him than having my ISA allowance. Hopefully we won’t need to find out.

 

Julie Hunt 
I won’t tell him how much you’ve got in your ISA if he asks, Becky.

 

Emma Knights
Do we have any other questions about ISAs today?

 

Becky Campion 
Oh, I can’t think of any more questions. I think we have covered pretty much everything.

 

Julie Hunt 
I’m really excited for when we start talking about funds and things like that because that’s when we really get down to the exciting stuff!

 

Emma Knights
Not too much longer and we’ll bring that to you soon!