This April will mark 20 years of Individual Savings Accounts (ISAs). During the last two decades, they’ve become an integral part of saving, investing and financial planning for millions of people. If you’re not already up to speed on what an ISA can offer you, now is the perfect time to read up on them and see if you’re getting the most out of your account.

ISAs were launched on 6 April 1999, replacing the existing Personal Equity Plans and Tax-Exempt Special Savings Accounts. When first announced during a Budget given by then Chancellor Gordon Brown, they weren’t exactly welcomed. But since then, millions of ISAs have been opened and there’s a huge range of providers to choose from.

Over the last 20 years, other ISA products have launched alongside the most popular Cash and Stocks and Shares options, providing an effective way to save for a child’s future or retirement, for example.

The attractive feature of an ISA over other saving vehicles is they are tax efficient; you don’t have to pay tax on interest or returns generated, so all the gains are yours to keep.

As a result, there’s naturally a limit on how much you can place into an ISA each tax year. When they first launched, it was just £7,000 overall, with a £3,000 limit on the amount that could be placed in a Cash ISA. Today, the annual subscription limit is £20,000, which can be split across different ISA accounts any way you choose.

If you withdraw money from an ISA, it cannot typically be re-deposited without using your annual allowance.

To maximise the benefits of your ISAs, you should aim to reach the subscription limit, or as close as possible, at the end of each tax year. With the end of 2018/19 approaching, now is a good time to look at your ISA deposits over the last 12 months to see if you could add more to the tax-efficient savings vehicle.

The success of ISAs

The official statistics on ISAs highlight how popular they’ve become:

  • There are around 10.8 million Adult ISA accounts with a market value of £608 billion
  • 72% of money placed in an ISA is held in cash, rather than being invested
  • During 2017/18, £69 billion was deposited into ISA accounts, with the average amount standing at £6,409
  • It’s estimated the cost of tax relief on ISAs in 2017/18 was around £2.9 billion

The different ISA products

As ISAs have grown in popularity, so too have the number of products available on the market. There are now broadly six different ISAs available to open.

Cash ISA: A basic Cash ISA is the most popular type of ISA available. You can use your full annual subscription in a Cash ISA if you choose. Assuming you stay within the limits of the Financial Services Compensation Scheme, the money deposited is safe. Your savings will generate interest, which will be free from Income and Capital Gains Tax. Interest rates are still low following the financial crisis, but shopping around can help you find the best deal.

Stocks and Shares ISA: Unlike a Cash ISA, the money you place in a Stocks and Shares ISA is invested. As a result, you have an opportunity to generate potentially higher returns. However, this comes with investment risk and it is possible for the value of your ISA to decrease. Most providers will offer several different risk profile aligned portfolios, allowing you to select the one that most closely matches your attitude to risk.

Innovative Finance ISA: The Innovative Finance ISA launched in 2016. Rather than holding cash or stocks and shares, it holds peer-to-peer loans and crowdfunding services. They’re attractive to some savers because of the potential for higher Income tax-exempt returns. The risk involved also tends to be higher than a traditional Stocks and Shares ISA. As a result, it’s typically more suited to those that have a higher capacity for loss. You can choose to deposit your full annual ISA subscription or a portion of it into an Innovative Finance ISA.

Lifetime ISA (LISA): The newest ISA product to launch is the LISA. It aims to create a tax-efficient way to save for your first home or retirement. You can deposit a maximum of £4,000 into a LISA each tax year. However, deposits benefit from a 25% government bonus, making it an attractive option. A LISA can either be a Cash or a Stocks and Shares ISA. However, there are some limits to note; you can only open a LISA if you’re aged between 18 and 40, and you will face a penalty if you withdraw the money before the age of 60 for a purpose other than purchasing your first home.

Help to Buy ISA: The Help to Buy ISA was introduced to help people trying to save for their first home. You can open an account with up to £1,200, and then add up to £200 each month. The government will then add a 25% bonus up to a maximum of £3,000, boosting home deposits. If you want to save into a Help to Buy ISA, you must open one before 30 November 2019 as the scheme is closing. You can keep paying into existing accounts until 30 November 2029.

Junior ISA: For those that want to save for a child’s future, the Junior ISA may be a good option. The annual limit is lower, at £4,260, but as with an Adult ISA, deposits can either be held in cash or invested. Again, interest or investment gains are not taxed. Once the child reaches the age of 16, they’re able to take control of the account, but withdrawals cannot be made until they turn 18.

If you’d like help understanding your ISA use, or which type of ISA would be best for your circumstances, please contact us.

Please note: The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.