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All You Need to Know About the Individual Savings Account (ISA)

ISAISAs are basically savings and investment tools which offer you tax-free returns on the investment you make. Once you pop your money into an ISA, it will be protected from dividend taxes, capital gains tax and income tax.

This means that you will have a chance to hold on to a big percentage of your gains, hence your wealth shall grow at a faster rate. The rules of the ISAs keep changing due to government regulations every year, but the basic principles still remain the same.

There are various forms of ISAs that can be offered by separate ISA providers. Take a look at the various forms types of ISAs and how they work.

Cash ISAs

This is the simplest form of ISAs. It works just like the saving accounts and can be operated using a building society or a bank. These ISAs are available to the UK citizens aged 16 and above. They can be in the form of fixed-rate ISAs which usually pay higher interest rates but charge fees for withdrawals or in the form of easy-access cash ISAs which have no penalty for withdrawals. The interest earned on Cash ISAs is tax-free.

Stocks and Shares ISAs

These ISAs are also called investment ISAs; you invest rather than save. This ISA is available for UK citizens aged 18 and above. Due to this, these ISAs are riskier but have the potential for higher returns. The returns depend on how the investment fund performs, and this may include mixed funds, government bonds and company shares, government bonds or mixed funds.

Innovative Finance ISA

This type of ISA is focused on peer-to-peer lending. Tax-free capital gains and tax-free interest can be received on the funds lent through the FCA-regulated peer-to-peer lending platforms.

Lifetime ISAs

These ISAs are aimed at helping you save for your home or for retirement after the age of 60. You can only apply for this type of ISA if you are aged below 40 years. The government adds a 25% bonus in addition to the contributions made. If you want to withdraw for other reasons (apart from death or terminal illness), you get a penalty charge of 25% on the withdrawn value.

Junior ISAs

These ISAs are aimed at helping youngsters build their savings and receive the money when they attain age 18. The money saved can be put into investments or cash. Only one junior ISA account is allowed per child, but you can transfer an account from one ISA provider to another. The account does not require any maximum balance so long as one stays within their Junior ISA allowance every tax year.

ISA savings potential

As from 6/4/2018 to 5/4/2018, one can invest up to a total of £20,000 in the ISA. You have the option to invest all your yearly ISA allowance into one form of ISA or split the allowance. However, you should note that you can invest in only one of every type of ISA every tax year.