How to work out which Isa is right for your money

There are five different types of Isa available now, with another one due to launch in April. Here's a look at which might be right for you.

Love Money
Last updated: 23 May 2018 - 11.23am

With four adult Isas now available, you could be confused as to which one is right for you.

Here's what to consider about each before you decide where to put your allowance.

A reminder of Isa rules

The total amount of money you can invest in one or more Isas is capped at £15,240 for the 2016/17 tax year. However, this limit will rise to £20,000 for the new tax year, which starts on 6 April.

This 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. Now let's take a look at each type of Isa and what it offers.

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 launched attractive rates around the end of the tax year to attract savers looking to use up their annual Isa allowance at the last minute.

Sadly competition for savers' cash has waned over the last few years – especially since the launch of the Personal Savings Allowance – and rates on cash Isas are pretty poor. 

Right now the top rate on an easy access account is 1.05% from Paragon Bank which you can open with £1.

If you are prepared to lock your money up for a few years, then the Paragon Bank Five-Year Bond offers a rate of 1.75% with a minimum deposit of £500.

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.

Stocks & shares Isas

Alternatively you can invest all or part of your annual ISA allowance into a stocks and hares 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.

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

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

Innovative Finance Isas

Investors can use an Innovative Finance Isa to get tax-free returns from the money they put into peer-to-peer loans made via platforms like Lending Works and Landbay.

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 Innovative Finance Isa as well as a cash Isa and a stocks and shares Isa.

What kind of returns can you get? Annoyingly, most of the biggest peer-to-peer lenders, including Zopa and RateSetter, have yet to launch their Innovative Finance Isas.

However, you can get a rate of 7% at Crowdstacker.

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, many 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. 

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

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 allow you to hold multiple Isa products within a cash Isa wrapper.

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.

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