The complete ISA guide

Whether you're looking to open your first ISA, or you want transfer an existing ISA, our complete ISA guide will provide you with all of the information you need to know.

 

1. What is an ISA? 

2. What are the different types of ISA?

3. Who can open an ISA?

4. Should I get an ISA?

5. Which is the best ISA?

6. Which is the safest ISA? 

7. What are the benefits of an ISA? 

8. How many ISAs can I have?

9. How much can I put in an ISA? 

10. Can I withdraw money from an ISA?

11. Can I transfer an ISA?

12. How do I transfer an ISA?

13. How do I open an ISA? 

14. ISA summary

 
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What is an ISA?

An Individual Savings Account (ISA) is a type of savings and investment account that benefits from a tax wrapper, allowing you to save and/or invest without paying tax on any interest you earn or any profits you make. ISAs were set up in 1999 to encourage saving and investment and they provide a way of investing up to £20,000 a year (in the 2019/20 tax year) without paying tax on the investments.

There is a cap on how much you can save or invest in an ISA per year, called the ISA allowance. This allowance refreshes each year, and if you have not used your allowance you’re not able to carry over any unused allowance into the new tax year. The ISA allowance for 2019/20 is £20,000. 

There are 5 main ISA types available and an individual can invest into one of each kind of ISA each tax year. The tax year runs from the 6th April until the 5th April the following year. This means you have until the 5th April 2020 to use up your ISA for this tax year which currently stands at £20,000. In this guide we look at the various types of ISAs available to individuals and how you can select the best type of ISA based on your financial goals, risk appetite and personal circumstances.

The main 5 types of ISA that all offer tax free allowances are;

Cash ISA

A Cash ISA is a type of savings account offered by UK regulated banks and building societies where money is protected under the Financial Compensation Scheme (FSCS) up to the amount of £85,000 should the provider fail. 

There are three types of Cash ISA (Flexible Cash ISA, Instant Access Cash ISA and Fixed Rate Cash ISA) which can be opened by anyone over the age of 16. The potential tax free returns over a five-year term average between 0.7% up to 2.25%

Cash ISAs are generally best suited to those that require easy access to their money and are looking for a short term saving solution.

Stocks and Shares ISA

A Stocks and Shares ISA is a form of investment account unlike a Cash ISA which is a savings account and can be opened by anyone over the age of 18.  

With a Stocks and Shares ISA, investments are held within the ISA and any growth or interest earned is tax free. With a Stocks and Shares ISA, you can earn capital gains, interest on bonds, or dividend income by putting your money into a range of different investments. Over the long term, stock markets average returns of around 7.5%.

Stocks and Shares ISAs are generally best suited to individuals looking for long term investment. This is due to to the volatility of the stock market where investments can go up as well as down, with most financial advisors recommending indiviguals should invest for a minium of five years. With a Stocks and Shares ISA, capital is not protected and is at risk and past performance is not a reliable indicator of future returns. 

Junior Cash ISA

Junior ISAs, like an adult Cash ISA is a form of tax free indiviual savings account designed for children under the age of 18. Like a Cash ISA they are protected under the Financial Compensation Scheme (FSCS) up to the amount of £85,000. 

Designed to encourage parents and legal guardians to save for their childs future, the Junior Cash ISA allows you to save up to £4,368 in the current 2019/20 tax year. The child will be able to take control of the ISA at the age of 16, but must wait until the age of 18 to withdraw any money. The potential tax free returns per annum currently stands at 3.6%.

Lifetime ISA

Lifetime ISAs have been designed to encourage saving for either buying your first home or retirement. They are a form of savings account that can be opened by anyone over the age of 18 but under 40. Lifetime ISAs work by savers paying in up to £4,000 per year until they are 50, with the government bonus of 25% on top of your contributions each month. In addition to the government bonus, the ISAs will still earn regular interest which currently stands at around 1% per annum

Whilst you can take funds out of your Lifetime ISA account at any time, there are penalties to pay and therefore these types of ISAs are best suited to indiviguals who are confident that they will not need to access these funds until buying their first home or before the age of 60 for retirement.

Innovative Finance ISA (IFISA)

An IFISA is an investment product unlike a Cash ISA which is a savings product. Because an IFISA is an investment product it carries much higher risk than that of a Cash ISA when comparing the two. The majority of IFISAs work by investing money into FCA authorised P2P lending platforms known as IFISA providers

IFISAs work by investing money through a platform that aims to generate returns through lending money to three key sectors which are personal loans, small business loans and property loans.

Following new rules introduced by the FCA from January 1st 2020 regarding the promotion of speculative mini-bonds, only experienced investors classified as either sophisticated or high-net-worth are eligible to invest into mini-bonds, which the FCA describe as ‘where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property.’ 

Though investing into mini-bonds through an IFISA is now restricted, everyday (restricted) investors may still be eligible to invest into other types of IFISA - such as SME lending, consumer lending and green energy - though the FCA states that everyday investors new to the P2P sector must not invest more than 10% of their investable assets. If you’re unsure about your investor classification and whether you’re eligible to invest, you should speak to an independent financial advisor and check with individual platforms about their eligibility criteria

An IFISA allows individuals to invest some or all of their £20,000 tax free ISA allowance into one IFISA platform per year with average returns currently standing at between 3%-15%.  However it is important to understand that comparing which IFISA to invest into is not a case of comparing based on interest rates on a like-for-like basis as the risk profiles of each IFISA will vary. A general factor to take into consideration is that with higher rates of interest comes a higher risk profile of the IFISA you are investing into. 

All ISAs serve a specific purpose (detailed in the ‘what are the different types of ISA?’ section) and as well as benefiting from a tax free ISA allowance, they have their own individual advantages. So no matter why you’re saving or what you’re saving for, ISAs - and their tax free status - offer your savings a generous boost, making them a great place to start.

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What are the different types of ISA?

Cash ISA

Cash ISAs are offered by UK regulated banks and building societies that are form of savings account.  Cash ISAs are the most popular and simplest type of ISA on the market. They are a tax free way of saving money, meaning you keep all of the interest that you earn, provided your deposits remain within the annual tax free allowance (currently at £20,000 for the 2019/20 tax year.

There are three types of Cash ISA which include;

Instant-access Cash ISA
This allows you to pay in or withdraw money at any point without a penalty, though some providers may impose limits such as the amount you can withdraw before a penalty charge. Some instant access Cash ISAs also provide a short term bonus if funds are not withdrawn in a certain period such as a 12 month term. 
    
Many providers of Instant Cash ISAs will allow unlimited further additions which make them ideal for those wanting to regularly add to their savings.


Flexible Cash ISA
These types of ISAs work by allowing savers to withdraw any money from their account without it affecting their Tax Free ISA allowance, so long as the money is replaced within the same tax year. Not all providers offer Flexible Cash ISAs and some providers only offer this on variable rate ISAs. 
    
An example of how a Flexible Cash ISA works could be: You deposit £6,000 into your Cash ISA at the beginning of the Tax year, which leaves you with £14,000 of your tax-free ISA allowance. Let’s say you withdraw £3,000 in the August which decreases your balance to £3,000. This means you can still pay an additional £17,000 into the ISA within the same tax year. You repay £3,000 into your Flexible Cash ISA in January which increases your balance to £6,000 and you are still able to pay a further £14,000 in the same tax year.


Fixed-rate Cash ISA
With a fixed-rate Cash ISA, you’ll need to be willing to lock your money away for a fixed amount of time. This is rewarded with a fixed interest rate, generally meaning the longer the term, the more interest you’ll earn. By law cash ISA providers must allow access to your money whenever you want it. 

However in order to get your cash, some Cash ISA providers require you transfer out or close your account in order to get your cash. Currently the average returns of a five year fixed-rate Cash ISA stand at between 1%-2%, although some of these providers require a minimum investment amount in order to secure these rates.

With a Cash ISA, up to £85,000 of your money is protected by the Financial Services Compensation Scheme (FSCS) or £170,000 for joint accounts, should your ISA provider go bust. It is important to know that some banking brands are part of the same authorised firm. This means if you have more than the FSCS protected amount in your account, it is good to move the excess into another bank or building society under a different authorised firm. You can check to see which banks are part of which authorised firms on the Bank of England website.

Cash ISAs can be opened by anyone over the age of 16 who lives in the UK. They are aimed at individuals wanting to save in a low-risk way with easy access to their savings.  Cash ISAs mean you still have easy access to your money whenever you need it. If you’re certain that you won’t need early access to your funds though, a fixed-rate Cash ISA allows you to potentially earn higher rates of interest, giving your savings a little boost.

Cash ISAs will be most beneficial for individuals who require instant access to their savings. However, it’s worth keeping in mind that although Cash ISAs are the safest form of ISA, they also offer the lowest rates of interest - these range from just over 0.7% up to 2.25% over a five year term.

Stocks and Shares ISA

A Stocks and Shares ISA is a tax efficient investment account that allows you to put your money into a range of different investments, but - due to the fact that the value of your investments can go up as well as down - they may not be suitable for an investor with a low risk appetite.

Average returns on a Stocks and Shares ISA are around 7.5% over the long term, which is well ahead of inflation and the returns from Cash ISAs. That said it is important to understand that the value of investments in a Stocks and Shares ISA are subject to change and unlike holding your money in a bank deposit account such as an Cash ISA, capital is not protected should your investments fail.

Stocks and Shares ISAs are likely to be a better choice for investors with a long term outlook and those looking to protect any profits or interest from tax. Investors into Stocks and Shares ISAs should also be prepared remain patient when it comes to this type of investing, with their investment potentially remaining in a Stocks and Shares ISA for a minimum of five years and returns not guaranteed.  If your fund manager goes bust, you can claim compensation of up to £50,000 from the FSCS (if your fund manager is covered) per person, per institution.

Although it is advisable to hold your investments for no less than five years, there is no minimum amount of time you must hold your Stocks and Shares ISA before selling the assets held in it, you can do this at anytime. However, if you choose to cash in some or all of your Stocks and Shares ISA, you are only able to reinvest the money into another ISA to the extent that you have unused ISA allowance. 

Many Stocks and Shares ISAs will charge a fee for both using the platform and for buying funds, often taking a considerable amount from your investment. However there are cheaper alternatives if investors take the time to compare providers and can even make use of a service such as a robo-advisor. Robo-advisors are increasingly growing in popularity which enable investors to access digital financial advice and select stocks and shares this way. 

Junior ISA

The Junior ISA is a specific product designed for under 18s to build up cash savings for their future. There are 2 types of Junior ISAs available which are: A Junior Cash ISA (available through banks or building societies) or a Junior Stocks and Shares ISA.

Junior ISAs are aimed at parents or guardians to save for a child’s future, which can be a worthwhile savings account (if selecting a Junior Cash ISA) or investment account (if selecting a Junior Stocks and Shares ISA).

Both types of Junior ISAs can provide long term, tax free earnings for a child's financial future, however the type of ISA you choose (both or just one) will depend on your attitude towards risk and which product is most suitable for your financial goals and circumstances.
 
The Junior Cash ISA is available to anyone under the age of 18 living in the UK, and can be opened by a child's parent or legal guardian who can enable saving on behalf of their child. The child will then be able to take control of the ISA at the age of 16, but must wait until the age of 18 to withdraw any money. 

With tax free returns of up to 3.6% per annum the Junior Cash ISA is a family friendly method of laying the foundations for your child's financial future with tax free earnings, even if the child starts work.

Junior ISAs are a great way to kick-start a child’s savings, and they receive the same tax free benefits as adult ISAs. The allowance for Junior ISAs is lower than adult ISAs however. For the 2019/20 tax year, the Junior ISA allowance is £4,368. 

Though Junior Stocks and Shares ISAs have the potential for larger returns, they also have more risk attached as the value may fall, meaning your child could get back less than has been paid in. Although Junior Cash ISAs don’t see as higher returns as the potential of a Junior Stocks and Shares ISAs, they are by far the safer option, with all savings protected by the Financial Services Compensation Scheme (FSCS) up to £85,000.

Opening a Junior ISA for your child could eventually help them pay for higher education, buy their first car or put down a deposit on their first home - as well as giving you the peace of mind that the foundations for your child’s financial future are firmly in place.

Lifetime ISA

A Lifetime ISA is a government-backed savings scheme designed to help people buy their first home or save for retirement. The government pays a 25% bonus on whatever you save - up to a maximum of £1,000 per year - which is paid into your Lifetime ISA account each month.

If you are using your Lifetime ISA to save to buy a home, you must be a first time buyer. If you are using it to save for retirement, you can only pay into the account until you are 50, and you must wait until you turn 60 to withdraw funds. 

If you’re saving to buy your first home, you now only have the option of saving with a Lifetime ISA rather than a choice of the Help to Buy ISA (if you didn't already open a HTB ISA before the 30th Nov 2019). 

As far as first time buyers are concerned, a Lifetime ISA offers the same amount of Government Bonus (25%) as the former Help to Buy ISA offered, the main difference being, you can only use your Lifetime ISA to buy your first home 12 months after your first payment into the account. If funds are withdrawn before this time, the 25% government withdrawal charge is payable.

A maximum of £4,000 can be placed into a Lifetime ISA each year, all of which is linked to your annual ISA allowance (currently £20,000 for the 2019/20 Tax Year). Whilst you can only have one Lifetime ISA account at any one time, you can still spread your annual ISA allowance across different types of ISAs such as a Stocks and Shares ISA or an Innovative Finance ISA.

Innovative Finance ISA (IFISA)

Introduced by the government in 2016, Innovative Finance ISAs (IFISAs) are one of the latest additions to the ISA family. 

An IFISA allows you to use some, or all, of your annual ISA allowance (currently £20,000 in 2019/20) to lend funds through the peer-to-peer (P2P) lending market while receiving tax free interest and capital gains.  In some instances you can generate returns of around 3%-15% with an IFISA by taking stakes in ‘Crowdfunded’ investments and lending to private borrowers in Property, Green energy, SME lending and Consumer lending markets.

The simplest way of explaining IFISAs is that it is an ISA that contains peer-to-peer loans instead of cash. Investors are matched with borrowers who are typically businesses, property developers or individuals. IFISAs have the potential to offer much higher rates of returns when compared to Cash ISAs. The reason being is that by cutting out a bank and investing in an IFISA through an online portal (also known as peer to peer lenders) there are usually no hidden fees to pay that can cut the level of interest returned.

Despite IFISAs growing in popularity with over £1billion invested in them since 2016, many inexperienced investors are unaware of their high risk profile.

Any type of investment carries an element of risk and IFISAs are no different, so much so that in December 2019, the Financial Conduct Authority (FCA) implemented a new rule that prevents individuals from investing more than 10% of their assets in peer to peer investments unless they have taken financial advice. Although regulated by the FCA, P2P lending is not protected by the FSCS, meaning your capital is at risk and returns are not guaranteed. 

As with all ISAs the IFISA benefits from Tax free returns, and can be opened alongside other ISAs such as a Stocks and Shares ISA, Lifetime ISA, and Cash ISA. However only one IFISA can be opened at any one time, although transferring IFISAs is possible depending on the provider. 

IFISAs are great for people who want a greater level of risk in their investment portfolio. They offer better returns than is available through a Cash ISA, with more assurances in regards to security than is offered by a Stocks and Shares ISA, making them the perfect middle ground.

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Who can open an ISA?

To be eligible to open an ISA, you must;

  • Be a UK resident
  • Be aged 16 or over (Cash ISA)
  • Be aged 18 or over (Stocks and Shares ISA and IFISA)
  • Be aged 18-39 (Lifetime ISA)

You cannot hold an ISA on behalf of someone else unless you open a Junior ISA for a child under the age of 18.

Following new rules introduced by the FCA from January 1st 2020 regarding the promotion of speculative mini-bonds, only experienced investors classified as either sophisticated or high-net-worth are eligible to invest into mini-bonds, which the FCA describe as ‘where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property.’ 

Though investing into mini-bonds through an IFISA is now restricted, everyday (restricted) investors may still be eligible to invest into other types of IFISA - such as SME lending, consumer lending and green energy - though the FCA states that everyday investors new to the P2P sector must not invest more than 10% of their investable assets. If you’re unsure about your investor classification and whether you’re eligible to invest, you should speak to an independent financial advisor and check with individual platforms about their eligibility criteria.

ISAs are suitable for anyone - as long as you meet the above eligibility criteria - who wants to save or invest while receiving tax free returns. So, whether you have short-term goals such as saving for a wedding or a deposit on your first home, or long-term goals such as saving for retirement or kick-starting your children’s savings, ISAs could be a great way to make the most of your savings and/or investments. We have broken down the different types of ISA available and who they would best suit in the section “What are the different types of ISA?”.

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Should I get an ISA?

If you’re considering opening an ISA, it’s important that you think about whether or not they are the best option for you, and whether they’re still a good place for your money.  

There are a number of differences between ISAs and traditional savings accounts, the main one being the tax wrapper. While all savings interest on ISAs is tax free forever, this is not the case with traditional savings accounts. 

However, the introduction of the personal savings allowance in 2016 meant that ISAs were no longer the only way to save while earning interest tax free. The personal savings allowance enables savers using traditional savings accounts to earn a certain amount of interest tax free, depending on their tax rate.

For basic-rate (20%) taxpayers, savings interest up to £1,000 is tax free, and higher-rate (40%) taxpayers can save up to £500 before paying tax. Additional-rate taxpayers are not eligible for the personal savings allowance, meaning the only way they can save without paying tax on interest, is to hold an ISA.

Other differences between ISAs and traditional savings accounts include;

  • Traditional savings accounts allow you to pay in anything up to the individual account limit (dictated by providers), while you can only invest a maximum of £20,000 in ISAs during the 2019/20 tax year.
  • ISAs allow you to invest in cash, stocks and shares and P2P lending, whereas traditional savings accounts deal only with cash.
  • Traditional savings accounts tend to offer higher interest rates for most terms, however the amount saved on tax from using an ISA could outweigh interest made.
  • Lifetime ISAs and Help to Buy ISAs benefit from a government bonus, which traditional savings accounts do not.

Although there are now more ways to save tax free, ISAs still offer great benefits - and depending on your circumstances, may still be the best way for you to make the most of your savings. 

For example, if you’re saving for your retirement, or to purchase your first home, then a Help to Buy ISA or a Lifetime ISA may be the best option for you, as these ISAs benefit from a 25% government bonus, giving your savings a significant boost. 

Additional-rate taxpayers (who are not eligible for the personal savings allowance) and those with a large amount of savings (whose savings interest is likely to exceed the £1,000 tax free allowance) would also benefit more from the likes of a Cash ISA.

If you’re only planning on saving cash, then a traditional savings account (or a Cash ISA) would work fine. However, if you’re interested in taking more risks for the potential of higher returns, you may choose to invest with an IFISA and/or a Stocks and Shares ISA.

As you can see, there are a lot of things to consider, and both traditional savings accounts and ISAs have their benefits. The most important thing is to figure out what is going to be best for you and your circumstances.

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Which is the best ISA?

The best ISA for you depends on your circumstances and investment goals. It’s important to remember that you can split your annual ISA allowance across multiple types of ISA, so you don’t have to limit yourself to just one if you don’t want to. 

One of the most important things you must ask yourself when deciding which is the best ISA for you is how much risk you are willing to take. All ISAs carry an element of risk - some significantly more than others. 

If you’re looking to save with the lowest possible risk, then a Cash ISA (or a Help to Buy or Cash Lifetime ISA) may be the best option for you, as your capital is not at risk and up to £85,000 of your money is protected by the FSCS. However, below inflation interest rates mean that your money may lose value over time. 

Stocks and Shares ISAs are at the mercy of the stock market, and if the stock market is performing poorly, there is a chance that you will end up with less than you contributed. Stocks and Shares ISAs are protected by the FSCS for up to £50,000, however this only protects you in the event that your provider goes bust, not if your investment(s) perform poorly. 

With IFISAs, your capital is at risk, and they are not protected by the FSCS. Returns rely on borrowers making repayments, so the biggest risk with IFISAs is that the borrowers default on their loans. However, platforms will usually have their own measures in place to mitigate risk.

It’s generally the case that, the longer you have your savings and/or investments tied up, the higher the returns you will receive. However, if you think you might need access to your money at short notice, then fixed term Cash ISAs and IFISAs are probably not for you - but you may want to consider an instant-access Cash ISA, where you can withdraw your money as and when you need it.

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Which is the safest type of ISA?

ISAs vary in regards to risk, and it’s important that you are aware of the risks of each before making any decisions on which to use to save and/or invest. 

Generally, the safest type of ISA is a Cash ISA. This is because, with a Cash ISA, your capital is not at risk, and - as long as you open your Cash ISA with an FCA approved authorised bank - your money is protected by the FSCS for up to £85,000 should your ISA provider fail. 

Fixed-rate Cash ISAs usually offer a better rate of interest than instant-access Cash ISAs, however this comes with slightly greater risk. Inflation might rise above the fixed-rate, so the value of the capital is eroded, or market rates might rise above the rate you are tied to, so you lose out.

Stocks and Shares ISAs can offer greater returns, but they’re subject to the performance of the stock market, and any money you lose due to your investments performing badly is not protected by the FSCS.

IFISAs provide great middle ground between Cash ISAs and Stocks and Shares ISAs. They offer the potential for greater returns than Cash ISAs, with more security assurances than Stocks and Shares ISAs. Also, property bonds held in an IFSA may be secured against the asset whose acquisition or development they were issued to fund. 

However, IFISAs are still investment products, meaning your capital is at risk. Although they are FCA authorised, IFISAs are not protected by the FSCS, and even if an IFISA is asset-backed, an economic downturn could affect returns and you may not get back the amount invested.

It’s usually the case that, the more risk an investment carries, the higher the potential returns. But, you must consider your own risk profile - which will depend on your personality, goals and circumstances - before making any investment decisions. For example, somebody approaching retirement could well be more inclined to protect the value of their savings, while a younger person - calculating that they still have time to make up for losses - may lean towards a higher risk/higher growth strategy. Similarly, somebody who is relatively wealthy might have funds they can afford to lose and so may be inclined to put them in higher risk investments, while someone with limited money may be less willing to risk it.

It’s highly advisable to speak to an independent financial advisor before making any investment decisions, so they can assess your risk profile and make appropriate recommendations. 

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What are the benefits of an ISA?

The main benefit of an ISA is the tax-wrapper, making any returns generated from savings and/or investments tax free. This means that you don’t pay tax on profits on stocks and shares held within your Stocks and Shares ISA, on interest earned on bonds, or on dividend income. 

Outside of an ISA, you would pay tax on any profits above the annual capital gains tax allowance - which is £12,000 for the 2019/20 tax year - made from investing in stocks and shares. Basic-rate taxpayers would be subject to tax at 10%, while this would increase to 20% for higher-rate and additional-rate taxpayers.

In regards to dividend income, outside of an ISA you would pay tax on anything above the dividend income allowance - which is £2,000 for the 2019/20 tax year. This would be 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.

ISAs can also be great for achieving portfolio diversification. As long as you do not exceed the annual ISA allowance and do not add funds to more than one of the same type of ISA per year, it’s completely up to you how you choose to save/invest. For example, you could choose to add £5,000 into a Cash ISA, £5,000 into a Stocks and Shares ISA and £10,000 into an IFISA - making the most of your £20,000 allowance for 2019/20. 

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How many ISAs can I have?

In each tax year (6th April-5th April) you are able to have more than one ISA, as long as you do not exceed the annual ISA allowance or add funds to more than one of the same type of ISA. You can split your allowance across a combination of different types of ISA, such as a Cash ISA, Stocks and Shares ISA and an IFISA. 

Help to Buy ISAs are a type of Cash ISA, therefore you cannot add funds to a Help to Buy ISA and a Cash ISA in the same tax year. 

There is no limit on the amount of ISAs you can hold overall, for example you can hold several Cash ISAs and IFISAs (as long as you only add funds to one of each type per tax year). However, the rules surrounding Help to Buy ISAs are a little different, as you are only able to hold one at a time. 

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How much can I put in an ISA?

In the 2019/20 tax year, savers and investors are able to deposit up to £20,000 into ISAs. Though some types of ISA - including Help to Buy and Lifetimes ISAs - have different annual limits, anything you pay into an ISA will be deducted from your £20,000 allowance. 

Cash ISAs, Stocks and Shares ISAs and IFISAs all have a maximum allowance of £20,000 for the 2019/20 tax year.

Lifetime ISAs have a maximum allowance of £4,000 per year. 

With a Help to Buy ISA, you are able to save up to £1,200 within the first month of opening the account, and then a maximum of £200 per month thereafter.

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Can I withdraw money from an ISA?

Each ISA type, and ISA provider, have different rules regarding the withdrawal of funds. 

Withdrawing from an IFISA

Most IFISA providers and P2P lenders don’t allow you to withdraw funds from your IFISA until the end of the specified term.

Withdrawing from a Cash ISA

With an instant-access Cash ISA, you are able to withdraw money at any point without losing any tax benefits. 

On the other hand, if you hold a fixed-rate Cash ISA, your money is locked away for an agreed term. If you choose to withdraw before the term is up, you will typically lose a set number of days’ interest, or be required to pay an early withdrawal fee. 

If you hold a flexible Cash ISA, you are able to withdraw money and replace it within the same tax year without it affecting your ISA allowance. 

For example, if you have deposited your full £20,000 allowance for the 2019/20 tax year into a flexible Cash ISA and choose to withdraw £10,000, you are able to replace that £10,000 before the current tax year is over without exceeding your ISA allowance - even though you would have technically deposited £30,000.

Withdrawing from a Lifetime ISA

The rules for Lifetime ISAs are a little more strict. You are only able to withdraw from your Lifetime ISA without incurring penalties when you are aged 60 or above, unless the money is going towards buying your first home. 

You are also able to withdraw money from your Lifetime ISA penalty-free if you are terminally ill and have less than 12 months to live.

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Can I transfer an ISA?

Yes, you can transfer an ISA from one provider to another (as long as they accept transfers). You can also choose to transfer to the same type of ISA, or to a different type. 

There are some rules in regards to transferring an ISA;

  • If you want to transfer money invested in an ISA during the current tax year, you must transfer all of it.
  • If you want to transfer money invested in an ISA in a previous year, you can choose to transfer all or only part of it.
  • You can transfer ISAs as many times as you like.
  • You can transfer as much as you like - transfers are not governed by the annual ISA allowance.
  • You cannot hold stocks and shares in an IFISA, so you would need to sell those stocks and shares - so that your ISA is only holding cash - before transferring it into an IFISA.

There are steps that you must take when transferring an ISA in order to ensure your savings don’t lose their tax free benefits, so it’s important that you contact your provider to find out the best way to go about transferring. 

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How do I transfer an ISA?

If you’ve invested in an ISA and would like to transfer into another, you can do this easily by authorising your new ISA provider by completing an ISA transfer authority form. Your money will then be transferred directly from your old ISA provider to your new one. The form should take between 15 and 30 days to process.

You may be subject to transfer fees or early termination penalties, and you should never attempt to transfer funds between ISAs manually, as doing so may remove the tax free status of those funds.

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How do I open an ISA?

You can open an ISA with;

  • Banks
  • Building societies
  • Credit unions
  • Stock brokers
  • P2P lending services
  • Crowdfunding companies
  • Other financial institutions

ISA providers may have different processes and charges when it comes to opening an ISA, so it’s important than you contact that provider directly to find out what is involved in opening an ISA with them. You should also seek advice from an independent financial advisor to find out which ISA would be most suitable for your circumstances.

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ISA summary

So to round-up, ISAs allow you to save and/or invest while paying no tax on interest or profits. The ISA allowance for the 2019/20 tax year is £20,000. 

There are five main types of ISA;

  • Cash ISA
  • Stocks and Shares ISA
  • IFISA
  • Lifetime ISA
  • Junior ISA

Each type of ISA have their own pros and cons, so it’s important that you do your research to understand which may be the best for you. This will depend on your personal circumstances, what you are looking to achieve and your appetite for risk. 

As with all savings and investments, diversification is key. Understanding the risk and return profile of the three main types of ISA - Cash, Stocks and Shares and Innovative Finance - is essential. 

For example, in a low interest rate environment, Cash ISAs are safe - as long as you don’t exceed the £85,000 cap on an individual provider. However the rates are only between 1% and 2% per annum and barely keep pace with inflation. 

Stocks and Shares ISAs are subject to the fluctuations of the stock market. Over the long-term, they tend to perform well, but this varies significantly depending on the risk profile of a particular provider or portfolio. 

IFISAs are a great middle ground between Cash ISAs and Stocks and Shares ISAs, as they offer higher returns than is available with a Cash ISA, but with more security than comes with a Stocks and Shares ISA. However, IFISAs are an investment product, and they are not protected by the FSCS, meaning your capital is at risk.