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Which type of ISA is right for me?

08/05/2022

Investors are often attracted to ISAs (Individual Savings Accounts) because of the fact that they offer tax-free interest payments. But with four different types of ISA available, it’s important to choose the one that’s right for you. Your annual ISA allowance (£20,000) can be invested in one ISA type, or divided between different types.

Here, we explain what these ISA types are and how they work.

 

Cash ISAs

A cash ISA is essentially a savings account – but because of its ISA wrapper, it allows you to shelter your money from tax. Cash ISAs are available to UK residents aged 16+, and allow you to save up to £20,000 per year. 

Cash ISAs are a popular choice for those who think they may want to access their funds in the next five years. However, the rates of interest paid may not be as high as those of regular savings accounts, meaning that there may not be any real tax benefit to some investors. 

 

Stocks and shares ISAs

While a cash ISA is an ISA wrapper that sits around cash, a stocks and shares ISA is an ISA wrapper that sits around an investment portfolio. These investments could include investment funds, company shares, corporate bonds, unit trusts and government bonds. 

These are available to UK residents aged 18+, and, like cash ISAs, just one stocks and shares ISA can be opened per person, per year. As they are investments, their value can go both up and down – but generally, they’ll often outperform cash ISAs. These ISAs are often chosen by those who are happy to keep their money invested for the longer term. 

 

Innovative finance ISAs

An innovative finance ISA, rather than cash or stocks and shares, sees your money invested in peer-to-peer lending. Again, you must be a UK residents aged 18+, and can invest up to £20,000 per year in these ISAs – and it may be possible to earn higher rates of interest than a savings account.

However, the risk of the borrower defaulting means that the risk you take on will be higher – and with the FSCS not covering the collapse of peer-to-peer lending platforms, there is limited protection offered to investors.

 

Lifetime ISAs

Lifetime ISAs are designed to be opened by those aged 18-39: people who are looking to save for later life. You can learn more about lifetime ISAs in our article on the subject, here.

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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