If you’re looking to save or invest into an ISA, there are plenty of different options to choose from.
An ISA won’t be the right choice for everyone – it’ll depend on your personal circumstances. If you’re keen to invest in an ISA, the best choice for you may vary depending on your age, any savings you already have, your approach to risk and how long you want to tie up your money for.
Is an ISA right for you?
As long as the rules don’t change, ISAs will protect your assets from tax over the long term, enabling them to grow free of income tax, tax on dividends and Capital Gains Tax (CGT).
For the £20,000 in ISAs.
However, if you invest outside an ISA, you might not pay tax on investment returns anyway. You won’t pay tax on profits unless they’re above the annual CGT allowance, which is 2023-24 tax year.
Also, the first £1,000 of dividends earned from investments held outside an investment ISA are tax-free. This is known as the dividend allowance. If you exceed this, you’ll be taxed. Outside an ISA, the Personal Savings Allowance (PSA) gives basic-rate taxpayers a £1,000 tax-free allowance on interest from savings income a year; higher-rate taxpayers have a £500 PSA, while additional rate taxpayers aren’t entitled to this allowance.
Here’s our rundown of the various ISA options.
Young savers can open a cash ISA from the age of 16, or an investment (stocks and shares) ISA once they reach 18.
Parents wanting to save or invest on behalf of children who are younger than this have the option of a Junior ISA, which their child can access once they reach 18. You can save up to 2023-24 tax year.
As long as you’re prepared to accept the risk that they might fall in value, then over the long term an investment Junior ISA may provide the potential for greater returns than a cash Junior ISA. As the money can be left to grow for 18 years, this should hopefully allow plenty of time to ride out any stock market volatility along the way.
Your 20s and 30s
These years are often filled with important milestones, such as buying your first home, getting married and starting a family.
You may need to get your hands on your cash in a couple of years, in which case a cash savings account is likely to be your best bet. Most cash ISAs give you the flexibility to take out your money whenever you need to.
It may also be a time when your finances are stretched, particularly if you’re still paying off student debts. But even if you can’t afford to put away a big lump sum, saving smaller amounts regularly instead should hopefully enable you to build a decent savings pot over the years.
Saving regularly can also help you to establish a savings habit, which may pay off in the future.
If you’re saving over a time frame of five years or longer, you may want to consider investing. Although investing is higher risk and you might get back less than you put in, there’s also the potential for greater returns over the long term. If you’re unsure whether investing is right for you, seek professional financial advice.