ISAs turn 20 later this week, but the product that was once designed to simplify saving has morphed into a whole new beast, with numerous different types of ISA now available. But does this mean they're now too complex, and perhaps more importantly, are there too many of them?
ISAs were first launched on 6 April 1999. At that time, the maximum that could be saved into an ISA was £7,000, though £4,000 of that had to be in stocks and shares, leaving a £3,000 cash ISA allowance. This meant there were two basic types of ISA available – cash ISAs and stocks and shares ISAs.
Since then, the number of options available – much like the ISA allowance itself – has grown rapidly, particularly in the last few years. It's now possible to save up to £20,000 in the current tax year (and in 2019/20), the value of which can be split between several different forms of ISA, but the amount you're able to save in different accounts can differ. Let's take a look at a few of the options in turn (note that we'll be focusing on adult ISAs, rather than the Junior ISA variety):
- Cash ISA. One of the originals, the basic cash ISA hasn't changed much since its inception – savers can squirrel away funds up to their annual allowance and all interest earned will be shielded from tax, and with hundreds of different options available from different providers (both high street and challenger) there are plenty to choose from. Savers' returns will be based on either a fixed or variable rate of interest, with no risk to the original capital, and you can only save into one active cash ISA a year.
- Stocks and shares ISA. Another original, a stocks and shares ISA allows savers to invest in – you guessed it – stocks and shares. Rather than saving in cash, savers' money (again up to the full £20,000 ISA allowance) is invested directly into the stock market, allowing them to choose from any number of different funds and portfolios depending on their risk appetite. However, returns aren't guaranteed – there's the potential for returns to be greater than those enjoyed with cash ISAs, but it entirely depends on the performance of the individual funds and the stock market as a whole, so should only be considered by those comfortable with risk. You can save into a stocks and shares ISA alongside a cash ISA in the same tax year, up to a combined total of £20,000.
- Help to Buy ISA. One of the newer incarnations, the Help to Buy ISA was launched in December 2015 and specifically designed to help people save for their first home, with a generous Government bonus as an added incentive. Would-be homeowners can save up to £200 a month (with an additional £1,200 in the first month only) and will receive a 25% bonus on top of everything they save, which will be paid when they apply for their first mortgage. However, because this is classed as a cash ISA, savers won't be able to pay into another cash ISA in the same tax year, as per the usual ISA rules.
- Innovative Finance ISA. First available in April 2016, the innovative finance ISA was designed to be used for peer-to-peer investments, giving people the chance to invest in these platforms while benefiting from the tax-free wrapper that an ISA provides. The same annual subscription rules apply as with regular ISAs (up to £20,000 a year).
- Lifetime ISA. The most recent incarnation, the Lifetime ISA was launched in April 2017 and has a dual purpose – allowing people to save either for their first home or retirement. They can save up to £4,000 a year and will again receive a 25% Government bonus (this time paid monthly), but hefty penalties apply for those who withdraw the money for anything other than their first home or a pension. If the latter, the money has to remain untouched until the saver's 60th birthday. There are both stocks and shares and cash ISA versions available (though stocks and shares varieties are more common), and it should be noted that additional age restrictions apply. You can have a Lifetime ISA as well as a cash or stocks and shares ISA.
It already looks a bit complicated, but at their core, ISAs remain simple savings products – they allow you to shield up to £20,000 from the taxman each year, something that could be particularly useful for higher rate taxpayers and those who breach their personal savings allowance
Yet for some, the difficulty arises in knowing which type (or types) of ISA to choose – do they want to use an ISA to save for their first home, for example, in which case do they want to save in cash or stocks and shares? If the former, and they opt for a Help to Buy ISA, are they comfortable with the fact that they won't be able to save into another cash ISA during the same tax year? This is where the confusion can sometimes set in, and it may be compounded by the fact that providers seem to be launching even more savings products under the tax-free banner.
New entrants to the ISA market?
If you look for an ISA using a typical search engine, you may find some types that seem completely unfamiliar; some providers are touting Property ISAs, for example, and another is promoting a so-called Brexit ISA. However, neither of these are technically different types of ISA product; they offer the same tax-free wrapper, just with a different spin that the provider wants to promote.
Yet their attempt to stand out from the crowd could mean they end up alienating consumers even more, many of whom may just want a simple savings product that shields their money from tax. In this case, it could arguably be best to go back to basics, saving in either a cash or stocks and shares ISA depending on your preference, though of course making the most of the 25% Government bonus if you're serious about saving for your first home or retirement.
It may still seem a bit like a minefield, however, so if you're in any doubt, make sure to take a look at our ISA guides for more insight into these tax-free savings vehicles, and you may even want to seek financial advice – particularly if you're considering a stocks and shares ISA – so you can be sure you make the decision that's right for you.