Saving Money: What is an ISA?

I was only 20 years old when my friend, Tola, introduced me to the concept of ISAs. She was so excited to have recieved free money in her account and she wanted me to know about it. "Do you have and ISA, Yeye?", she asked. Me: "What is an ISA. I've never heard of it". I was curious because of her excitement. The free money she had received was the interest that was paid into her account because she had been diligent with her savings over the past 12 months, so she go some decent money back. The bank's interest rates were great at the time so it was favourable to save. It still is a great way of putting money aside, because your money remains yours and you won't pay tax on it.

If you would like to know more about ISAs, then this article is for you! Put simply, ISA stands for Individual Savings Account. It is a tax-free savings account that allows you save up to £20,000 per year without paying tax on your savings or investments.

So, what is an ISA?

What is a Savings ISA?

An ISA is different from a regular savings account. Put simply, ISA stands for Individual Savings Account. It is a tax-free savings account that allows you save up to £20,000 per year without paying tax on the interest you make from your savings or investments.

There are different types if ISAs:

1. Cash ISA
2. Stocks and Shares ISAs
3. Lifetime ISA
4. Innovative Finance ISA

Let's break these down further:

Cash ISA

This is usually, the simplest form of ISA where you pay money (cash) into your ISA account periodically. You may set up a direct debit or standing order from your current account to get paid into your ISA monthly. Every year, the Money Savings Expert provides us with information on the best cash ISAs. Looking through this can help you choose where to put your money for that year.

Remember that an ISA is different from a regular savings account. So, you must know what you can and can't do with the type of ISA you choose. Some ISAs are flexible, allowing you to make withdrawals, and you can put back the same amount you withdrew. Whereas, other types are not so flexible- this means that if you put in money, and then later take some out, you won't be allowed to replace that sum of money. Also, ISAs from different banks have different interest rates.

There are two main types of Cash ISAs:

Easy (Instant) Access Cash ISA: With this type of ISA, you can withdraw money if you need it and you won't get penalised. You can compare easy cash ISAs here to choose the best one for you.

Fixed-rate Cash ISA: This ISA offers a higher interest rate than the instant access option but locks your money away for a set period, often 1 to 5 years. If you withdraw the money early, you might face a penalty. Find the right fixed rate cash ISA for you here.

Before you open an ISA account. Think about your financial situation. Will you need the money sooner than the maturity date on the ISA account you're trying to open? If so, don't lock money away in an ISA that you'll need to access later because you may lose the interest on that account.

2. Stocks and Shares ISA

This is where it starts getting really interesting. With stocks and shares, your money is invested for you. Your money may be invested into stocks, bonds or funds with the aim of it appreciating but with every stocks and shares investment, the risk is high. I am not a financial adviser, so if this is something you'd like to consider, please, please, do your own research and get a financial adviser who may be able to guide you . This is for those who may want to be more adventurous with their money because there is also a chance your investment could lose value over time.

Some people take the risk and put their money in this type of ISA because they have a longer term view- say 5 to 10 years, and hope that the stock markets will work appreciably in their favour.

Here are some Do-it -yourself stocks and shares ISA platforms and funds:

1. Trading212
2. InvestEngine
3. Dodl
4. Freetrade
5. Interactive Investor
6. AJBell
7. Hargreaves Lansdown
8. Vanguard

With these, you can build, and keep track of your portfolio but note the associated fees before you delve in.

There are also some stocks and shares ISAs that are managed by real life experts or an automated service. Here are a few:

1. Invest Engine
2. Wealthify
3. Money Farm
4. Nutmeg

3. Lifetime ISA (LISA)

The LISA is a great choice for people aged 18-39 years of age. Unfortunately, if you're aged 40 years or over, this ISAs is not for you. So, even if you're 39 years old right now and have only One pound, hurry and open this ISA straight away as you'll still be reaping the rewards when you turn 40 and beyond. Once you've opened it, you'll have it for life! That's so great. I wish I could turn back the clock but it's a bit late for me. lol!

This ISA is designed specifically for those saving for their first home or when you reach the good age of 60 years, and the government adds a 25% bonus to your savings, up to £1,000 a year. Note that there are restrictions to this ISA- you can only use it to buy your first home or wait until your 60th birthday to withdraw the funds. So, it's for a specific purpose. So, if you can save £4000 in one year, you'll be eligible for £1000 bonus from the government. So, get saving!

4. Innovative Finance ISA

There is also the lesser known Innovative Finance ISA (IFISA). This ISA allows you to lend money to others through peer-to-peer lending platforms. In return, you earn interest on the money you lend, and as with other ISAs, the returns are tax-free. Be careful though, lending money to individuals comes with a risk and there can be a high price to pay if you end up losing your money.

I hope you've enjoyed reading this and getting some more knowledge about different types of ISAs. If so, please sign up for more.

Please note that this is purely for information and education and not financial advice. Please seek professional financial advice prior to taking financial decisions. Good luck with it and I wish you a happy saving future.