If you're looking at ISAs, you'll discover that there are stocks & shares ISAs, lifetime ISAs, innovative finance ISAs and cash ISAs. So let's dig deeper and find out some more information about these different ISA products.
In simple terms, stocks & shares ISAs means that your investment can be in shares or funds, whilst lifetime ISAs are for those aged 18 to 40 that are saving for a house or retirement. An Innovative Finance ISA sees your money being used to fund crowdfunding projects where money is lent to businesses that return the borrowed amount with interest.
There are two types of cash ISA; these being instant access and fixed-term. The instant access ISAs enable you to withdraw your money when you choose, whereas with a Fixed-Term Cash ISA you'll only be able to get your money back at the end of the term. Providers of fixed-term ISAs will allow a partial or full withdrawal to be made, although there may be a penalty imposed.
Now that we've met the ISAs, let's discover five reasons for choosing an ISA to save money.
Reason one - tax-free savings
Perhaps the best known reason for selecting an ISA is the tax-free status that it offers. For the 2020/2021 tax year, you're able to make deposits up to the allowance limit of £20,000. What this means is that you won't pay tax on the interest you receive, although you can only deposit up to £20,000 each tax year and you won't be able to add more to your account. However, that takes us to reason two.
Reason two - transfer in previous savings
Although there's currently a £20,000 limit on the amount you can deposit into an ISA each tax year, you can transfer into your ISA your savings from previous years with other providers. It's therefore possible to have, for example, £60,000 in an ISA earning interest if you've saved the maximum amount for three years.
Reason three - helps to save
ISAs not only help you to save by earning interest, but because an 'early access' charge will usually be applied if you choose to make a withdrawal, close the account, or close it by moving it to another provider before the maturity date, ISAs can encourage saving. The exception to this is instant access ISAs that will enable you to make a withdrawal when you choose. As a result though, the interest rate you'll receive is often lower than you'd get with a Fixed Rate Cash ISA.
Reason four - different types of ISAs available
As mentioned earlier, there are different types of adult ISAs available, so it's worth researching each type to discover which is the right one for you and your situation. It's important to remember that if you have more than one ISA, you'll still only be able to have up to £20,000 across all of them; not £20,000 in each ISA.
Also, it's not possible to hold funds in two ISAs of the same type in the same tax year. What this means is that you cannot simultaneously have two Cash ISAs, although you could have, for example, a Stocks and Shares ISA as well as a Cash ISA.
Reason five - you could know how much you'll be receiving
This only applies to the Fixed Rate Cash ISA because the interest you earn over the lifetime of the ISA doesn't change, even if the Bank of England base rate goes up or down. As a result, you'll know exactly how much you'll be getting at the end of the term because, as previously mentioned, all of the interest is paid to you free of income tax.