Which ISA is best: Cash, Stocks & Shares, Innovative Finance, Lifetime, Help to Buy or Junior?

ISAs have changed drastically over the past few years, meaning you can now choose from six different types. Here's everything you need to know about each.

What is an ISA?

An Individual Savings Account, or ISA for short, is a vehicle that allows you to save or invest without paying any tax on your returns.

They were launched in 1999 and replaced personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs).

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How much can I save into an ISA?

The total amount of money you can invest in one or more ISAs is capped at £20,000 for the 2018/19 tax year. 

This bumper allowance will make investing into an ISA far more attractive as more of your money can be placed into the wrapper and shielded from tax.

But remember, if you don’t use your allowance in a tax year you will lose it.

There are many ways you can take advantage of your allowance.

As well as the traditional Cash ISA and Stocks and Shares ISA there’s also the Help to Buy ISA, the Junior ISA for kids, the Innovative Finance ISA for peer-to-peer investing and the Lifetime ISA.

Here’s what you need to know about all of them. Each section ends with a suggestion about the type of saver (or investor) it is suitable for.

Cash ISAs

You can save all or part of your annual ISA allowance into a Cash ISA.

These accounts are available from banks, building societies and credit unions and can take the form of an easy access account, notice account or a fixed-rate bond.

Traditionally, providers launch attractive rates around the start and end of the tax year to attract savers looking to use up their annual ISA allowance.

Sadly, competition for savers' cash has waned over the last few years – especially since the launch of the Personal Savings Allowance – and though rates are on the increase, they're still pretty poor. Most don't keep up with inflation.

When looking into Cash ISAs, check whether an account allows transfers of previous years’ allowances or just takes new subscriptions and how much you will need to open one.

Suitable for: Anyone uncomfortable with risk and willing to accept a lower rate in return for security.

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Stocks & Shares ISAs

Alternatively, you can invest all or part of your annual ISA allowance into a Stocks and Shares ISA.

With a Stocks and Shares ISA you can choose how to invest your money. Investments can be made in individual company shares, unit trusts, investment funds, Government bonds and corporate bonds.

As well as shielding investments from interest, there is also no capital gains to pay on investments in a Stocks and Shares ISA.

You should only really invest in a Stocks and Shares ISA if you are happy to take a risk with your savings as investments can go down as well as up in value. Most investment experts recommend you only invest money you won't need for at least five years, to ride out short-term market shops.

There may also be charges to consider for the platforms and funds you pick, which will eat into your returns.

To get started take a look at our beginner's guide to Stocks & Shares ISAs.

Suitable for: Long-term investors who are happy taking on an element of risk in order to get a better return.

Junior ISAs

The Junior ISA, or JISA, is a way for parents to save or invest for their children free of tax.

JISAs replaced Child Trust Funds (CTFs) in November 2011. 

The JISA allowance for 2018/19 is £4,260 and the money can be invested in a Cash ISA and/or a Stocks and Shares ISA. Any money invested belongs to your child.

Either or both types of JISAs can be opened for any child under 18. From the age of 16 your child can also hold an adult Cash ISA, which means they can benefit from both allowances for a couple of years before turning 18.

Find out more over at The best Junior ISAs 2018/19. 

Suitable for: Parents (obviously) interested in building up a tax-free nest egg for their child.

Innovative Finance ISAs

Investors can use an Innovative Finance (IF) ISA to get tax-free returns from the money they put into peer-to-peer loans.

Peer-to-peer lending has become popular with savers looking for better returns on their cash, and are willing to take on some risk.

It involves lending money to individuals or businesses looking for loans. As there is no middleman in the shape of banks, the rates tend to be better for both sides.

Investors can spread their annual ISA allowance between the new IFISA as well as a Cash ISA and a Stocks and Shares ISA.

Most peer-to-peer platforms offer their own IFISA, limiting how much you can diversify your portfolio. However, providers such as Orca are now offering IFISAs with investments in several types of peer-to-peer lending, although there are high minimum investments and extra costs involved.

You should remember that investing in peer-to-peer has an element of risk, as borrowers can default on loans and investments aren’t protected by the Financial Services Compensation Scheme.

That said, some lenders have provision funds in place to help pay out in the event of bad debt and you can limit risk by spreading your investment among multiple borrowers - although these rarely guarantee you'll be paid back. 

Suitable for: Investors who understand the risks involved with peer-to-peer lending.

Help to Buy ISAs

The Help to Buy ISA was launched to help first-time buyers save a deposit for a home worth up to £450,000 in London or up to £250,000 in the rest of the country.

You can save up to £200 a month into a Help to Buy ISA (or £2,400 a year) and when you first open an account you can deposit a lump sum of £1,200. The money you save will boosted by a Government bonus of 25% when you come to buy your first home.

The minimum bonus the Government will pay is £400, so you will need to save at least £1,600 before you buy a house in order to benefit. The maximum bonus you can get is capped at £3,000. So the most it is worth saving into a Help to Buy ISA is £12,000.

The bonus is per individual not per household so you and your partner could effectively gain £6,000 from the Government to buy your first home together.

The rules state that you aren’t allowed to pay into a Cash ISA and a Help to Buy ISA in the same tax year.

However, certain providers, like Nationwide, Ulster Bank and Newcastle Building Society offer a 'split' ISA which allows you to hold multiple ISA products within a Cash ISA wrapper. For more take a look at our guide: Help to Buy ISA: what it is, how to apply and rates for first-time buyers.

Help to Buy ISAs will be available until 30 November 2019 and you must claim your bonus by 1 December 2030.  

Suitable for: Aspiring first-time buyers trying to build up a deposit. Ideally able to set aside money each month rather than in a lump sum.

Lifetime ISAs

The Lifetime ISA will enable anyone aged between 18 and under 40 (if you turn 40 on or before 6 April 2017 you won't be eligible) to save up to £4,000 a year (which will form part of your total ISA allowance for the year) and receive a Government bonus of 25% each year until you reach 50.

This means you could potentially get a £1,000 boost on your savings. If you save the maximum £4,000 a year from age 18-50 you would receive £32,000 in Government bonuses over 32 years.

The savings and the bonus can be used towards a deposit on your first home worth up to £450,000 (which is why the Help to Buy ISA is being phased out).

The money can also be used for retirement as the whole pot can be withdrawn tax-free after you turn 60.

Withdrawals for purposes other than buying a home or retirement will incur a charge, apart from within the first year, and you will lose the bonus and interest accrued on it.

If you transferred what you saved in your Help to Buy ISA to a Lifetime ISA in 2017 you will only be able to use the bonus from one scheme to buy a house.

The bonus that is not used, and any interest accrued on it, will be returned to the Government.

Savers will be able to open one Lifetime ISA each year which can be a Cash LISA or a Stocks and Shares LISA. You will be allowed to hold a Lifetime ISA alongside other Cash, Stocks and Shares, or Innovative Finance ISAs, all within an increased annual ISA and invest up to £20,000 in 2018/19.

For more read: Lifetime ISA: what it is and how it works.

Suitable for: Someone looking to set money aside for the future, specifically house-buying or retirement. 

Is an ISA still worth going for?

Thanks to the Personal Savings Allowance (PSA) the first £1,000 of interest a basic rate taxpayer, or the first £500 for higher rate taxpayer makes will be paid tax-free.

However, this doesn’t mean you should ditch your existing ISAs or not bother opening one at all.

That’s because ISAs help shield your savings and investments from tax in the long-term.

The ISA is also a lot more flexible than it used to be. Since April 2015 Stocks and Shares ISA can now be transferred to Cash ISAs and vice versa.

Savers can also withdraw and replace their savings within the same tax year without losing the tax-free benefits on the money too. So savers can cover their short-term needs without the long-term damage.

Finally, ISA tax benefits can be passed on to a spouse if the original holder died after 3 December 2014.

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