ISAs have hit the headlines again over the last week, most recently as Nottingham Building Society announced that it is launching a cash Lifetime ISA (LISA) – only the second available from the whole market.
It was also reported that the Government is thinking of launching a ‘Care ISA’ to help cover the cost of caring for our ageing population.
Although the details of the Care ISA are expected to be outlined in the upcoming social care green paper, the idea would be that on death, any unspent money left in the account would be exempt from Inheritance Tax and therefore simply passed on to the account holder’s family, tax free.
This would hopefully encourage people to retain some savings - rather than spending it all – which could then be available to pay for care if required.
The proposal faced an immediate backlash from those who fear that this would be a solution for just a small minority of wealthy people, rather than helping to solve the care crisis.
And it would be a further addition to an already hugely complex ISA system.
The Individual Savings Account (ISA) is 19 years old. It was introduced in 1999 as a replacement of PEPs and TESSAs and even at the beginning there was some confusion, as there were mini and maxi ISAs.
But that’s nothing compared to today. Now there are five main different types of ISA;
- Cash ISA – includes the Help to Buy ISA
- Stocks and Shares ISA
- Innovative Finance ISA
- Lifetime ISA
- Junior ISA
The current annual ISA allowance is £20,000 and you can split this between any of these ISAs (apart from the Junior ISA, which has a separate limit of £4,260), but you can only open one of each type, each tax year.
You can download our ISA guide for more details on each type of ISA and to check the allowances and rules of them all, but below are some Q&As on some of the more complicated aspects of choosing an ISA.
Q - Should I bother with a cash ISA?
Since the introduction of the Personal Savings Allowance (PSA), many savers will no longer pay tax on their savings - as for basic rate taxpayers the first £1,000 of savings interest outside of an ISA is tax free anyway. For higher rate taxpayers, the allowance is £500.
And with cash ISA rates often trailing behind the standard equivalent rates, those who are not already fully utilising their Personal Savings Allowance may be better off ignoring the cash ISA – for now!
But, as our recent article shows, as interest rates rise, the interest earned on any savings outside your cash ISA should start to grow, so some might find that you use your PSA more quickly than before, which could mean you have to pay tax on some of your savings unnecessarily.
Q - How do I use my full cash ISA allowance if I open a Help to Buy ISA?
As mentioned above, the Help to Buy ISA (H2B ISA) is part of the cash ISA allowance and as also mentioned, you are only allowed to open one cash ISA each tax year. So, as the maximum you can put into a H2B ISA is £200 per month (in addition to an initial £1,000 lump sum when it is set up) this falls well short of the maximum £20,000 annual allowance.
So, what can you do?
You can open a Help to Buy ISA and a stocks and shares ISA, Innovative Finance ISA and Lifetime ISA with different providers – as long as you don’t go over the £20,000 allowance.
But a problem arises if you want to deposit more into a cash ISA, in addition to the Help to Buy ISA. With most providers, even if they offer another cash ISA option as well as a H2B ISA, you are not allowed to open a second cash ISA with them in the same tax year, as this breaches the rules.
But some providers have what is known as a portfolio ISA feature. This means that if you were to open two cash ISAs with that provider in the same tax year, they are under the umbrella of just one ISA wrapper and therefore you can potentially use more of your total cash ISA allowance. So, check before you choose.
Q - Should I choose a Help to Buy ISA or a Lifetime ISA?
Our factsheet can help with this, but it does depend on a number of factors.
Overall the Lifetime ISA offers a better proposition for some, as the annual allowance is greater and the bonus will be added each month (when a deposit is made), as opposed to only when the property is purchased as with the H2B ISA. This means that the Lifetime ISA will benefit from compounded income or growth.
In addition, the price of the property that can be purchased is £450,000 regardless of where the property is – with the H2B ISA, the maximum property price outside London is £250,000.
Possibly most importantly, the Lifetime ISA has to be held for 12 months before it can be used towards buying a home, whereas the Help to Buy ISA just requires you to have deposited £1,600, as the minimum bonus is £400. So, if you were to deposit the maximum in the first month (£1,000 lump sum plus £200 maximum monthly deposit) and £200 in each of the subsequent months, you would be able to use the ISA and the bonus after only three months.
So, if you are looking to buy your home in the near future, you’ll need to choose a Help to Buy ISA.
But there are some other factors that need to be considered…
Cash or Stocks and shares?
The H2B ISA is a cash ISA – and therefore you do not have the option to invest into stocks and shares.
With a Lifetime ISA you can choose between cash and stocks and shares – and in fact there are more stocks and shares LISAs out there to choose from.
If you are looking at cash, there are only two cash Lifetime ISAs and they are both paying just 1% interest, as opposed to the best paying Help to Buy ISA, which is currently paying 2.50% (Barclays – soon to be 2.55%). Nationwide and NatWest will be increasing their H2B ISAs to 2.50% AER imminently, following the base rate rise.
How old are you?
The Lifetime ISA can be opened by those aged 18 to 39.
The H2B ISA can only be opened by first time buyers aged 16 or over – but remember that the bonus will only be paid on the purchase of the property.
Q - Can I switch my cash ISA provider?
Remember, just as with any other savings account, you should keep your money on the move to make sure you are earning as much interest as possible. And if you have built up more than £85,000 over the years with one provider, you might want to split the money to make sure it is fully covered under the Financial Services Compensation Scheme.
If you are looking to transfer your ISA – remember the golden rule. Go to your new provider and fill in their application and transfer form. They will then request the funds from your old provider for you. If you don’t follow this process and cash in your ISA yourself, you will lose the ISA wrapper forever!
Hopefully this is a useful aide to navigating the ISA maze but we always welcome questions or comments if there is anything else you need help with – or think it would be useful for your fellow savers. Email us on AskAnna or call 0800 011 9705.
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