ISA stands for ‘Individual savings account’, and it is something that every UK resident over the age of 18 (or 16 for cash ISAs) can access, and deposit up to £20,000 per tax year. Junior ISAs are also available for children.

The limit of depositing £20,000 per year can either be used for a singular ISA, or split across multiple accounts. It’s worth noting that you can only pay into one of each type of ISA in a single tax year.

Here are the four types of ISA available:

  • Cash ISA
  • Stocks and shares ISA
  • Innovative finance ISA
  • Lifetime ISA

Which ISA is the best option for me?

Most banks will typically offer a cash ISA, which is similar to a traditional savings account, with interest being paid on savings. However, the main benefit of a cash ISA is that you will not pay any tax on your earnings.

Stocks and shares ISAs are the main alternative to cash ISAs, but more beneficial. They allow you to invest money in the stock market, with the potential to make a lot of growth on your funds. There are different levels of risk that come with a stocks and shares ISA, meaning that you can choose what level you’re comfortable with, depending on your life stage and circumstances.

As financial advisers, we wouldn’t recommend taking out a cash ISA, due to the low returns. By investing in a stocks and shares ISA, we can utilise our bespoke model portfolio service to find the best investment for you. With five models at differing risk levels, our models have been designed to incorporate a selection of between 10-20 funds, with tailored percentage allocations to best suit your requirements.

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What is a lifetime ISA?

A lifetime ISA is typically used by younger people looking to purchase their first home, but can also be used to save for later life.

You can put in up to £4,000 per year into a lifetime ISA, until you’re 50, and must have made the first payment by the age of 40. The government will then add a 25% uplift to your savings, to a maximum of £1,000 per year. You can hold cash or stocks and shares in a lifetime ISA, or a mixture of both. 

Be careful though, as money can only be withdrawn from a lifetime ISA without penalty if you’re buying a first home, aged 60 or over, or are terminally ill with less than 12 months to live.

When should I take out an ISA?

ISAs are very popular, and as such, there is no set age or time in life that we’d recommend taking one out, as they can suit most individual circumstances. 

If you’re heading towards retirement, this is still a great time to take out an ISA, but usually we’d recommend choosing funds with a lower risk. This will reduce the chances of large losses, which could affect you more once you stop earning and need access to the money.

ISA vs pension fund. Which one is best?

Both ISAs and pension funds generate solid returns, with the latter typically generating more – as when you contribute, you also receive more investable money due to automatic tax relief. However, the issue with investing heavily in a pension fund is that you’ll have no access to that money without severe penalties until later on.

Pensions provide generous tax relief when you put money in, and you’d be able to take out up to 25% of your pension fund tax-free once you reach the age of 55. 

We advise our clients to use a combination of both pension and ISA investments to ensure that they still have some money that is easily accessible without heavy penalties – which is where an ISA comes into play.

If you can overpay into your pension comfortably, then it’s definitely worth doing, as you’ll receive the best growth on this fund. Make sure to keep some of your spare cash back however, and invest this into an ISA. If something were to happen where you need quick access to your money, then you can withdraw money from your ISA within roughly two weeks of requesting it without a big penalty. 


Are you thinking about investing into an ISA? We can help – get in touch with our team of financial advisers today!