Different types of ISA

What are the different types of ISA available?

There are lots of types of Individual Savings Accounts (ISA) available and it can get confusing, but the most common ISAs are cash ISAs or stocks and shares ISAs.

Other types of ISA you might come across include Innovative Finance ISAs, Lifetime ISA, and Junior ISAs. We’ll cover all of these in this article.

The benefit of an ISA over a regular savings account is you won’t pay tax on any interest earned or gains made on investments. You can save up to £20,000 per tax year into ISAs. Even if you have more than one ISA, the limit across all of your adult ISA accounts is £20,000.

You need to be over 18 to open an ISA, apart from Junior ISAs.

What’s a cash ISA?

A cash ISA is similar to a regular savings account, where you put your money in, and you’re guaranteed to get what you originally saved back, plus interest.

Cash ISAs can be a good choice for short-term savings (where you need to access the money within the next 5 years) or for those not comfortable taking risk with their savings, but may offer lower returns than investing your money.

Something to consider with cash ISAs is your savings + interest might not keep pace with inflation, so in the future your money could have less real spending power than a successful investment.

What’s a stocks and shares ISA?

When you put money in a stocks & shares ISA, you're investing it.

Investing means that you're putting your money into something with the hope that the value of it will increase over time. There's a chance that that may not happen though – in some cases the value can go down, you may even lose all your money.

With a stocks & shares ISA, your money could be invested in a percentage of a public company, for example. If the company does well, your share value increases, and if they don’t do well, your share value decreases.

But it’s not just shares you can invest in with a stocks and shares ISA - you can also invest in funds, exchange-traded funds, investment trusts, bonds and shares. What you invest in when you open a stocks and shares ISA isn’t automatic, you will usually have to make your own investment decisions.

A stocks and shares ISA is a tax-efficient way to invest as you don’t have to pay income or capital gains tax on the gains you make on your investments, unlike when you invest outside of an ISA. Plus, the return on your money may be higher than with a cash ISA.

They may be a good option to consider if you won’t need to access your money for a long time (at least 5 years), as a long term investment gives you more of an opportunity to ride out any dips in the market.

Can you have a cash ISA and a stocks and shares ISA?

Yes you can, but the annual ISA limit of £20,000 is shared across any ISA accounts you hold. So if you save £15,000 into your cash ISA, you can only invest £5,000 into your stocks and shares ISA within the same tax year.

What’s a flexible ISA?

If your ISA is flexible you can withdraw money from your ISA and later replace it without affecting your annual allowance, as long as it’s within the same tax year and with the same provider.

For example, at the start of the tax year you already had £10,000 saved in your cash ISA but you need to withdraw £5,000. If your cash ISA is flexible, you can replace the £5,000, and still use your full £20,000 allowance, making the total amount you’ve saved £25,000 over the tax year.

Both cash ISAs or stocks and shares ISAs can be flexible, but not all providers offer them, so keep your eyes peeled if this is an important feature for you.

What’s a Lifetime ISA?

A Lifetime ISA – also called a 'LISA' – is designed to help you save for your first home or later life (or both if you like). It's a government scheme that tops up your savings by 25%.

You can pay up to £4,000 into a LISA each tax year, and the government will top up 25% – that’s £1,000 extra per year if you use your full allowance!

You can open a Lifetime ISA if you’re 18 or over, under 40 and a UK resident. You must make your first deposit before your 41st birthday, and you can continue to add money into your Lifetime ISA until you’re 50. You can have multiple Lifetime ISAs, but unlike other ISA types, you can only pay into one per tax year.

After you turn 50 you can no longer pay into your LISA, but it will continue to earn interest/investment returns.

You can withdraw the money once you turn 60, when you buy your first home (as long as the price of the home is under £450,000, plus a few other conditions) or if you are terminally ill with less than 12 months to live.

If you withdraw the money for any other reason or transfer the money to a different type of ISA before you’re 60, you will have to pay a withdrawal charge of 25%.

You can hold cash or investments in a Lifetime ISA, or even a combination – just remember that stocks and shares ISAs involve more risk.

Read more about Lifetime ISAs

What’s an innovative finance ISA?

An innovative finance ISA (IFISA) is the final type of ISA, and much less common than the others.

IFISA is a product targeted at experienced investors, which allows you to invest for a longer time, in less-liquid investments. Less-liquid means it’s harder to sell your investments and get your money out if you want to.

Ways that you can invest with an IFISA include:

• peer-to-peer loans

• crowdfunding debentures

• alternative finance arrangements

• less-liquid investments

• cash

IFISA comes with a fairly high level of risk. The main risks are:

• No Financial Services Compensation Scheme (FSCS) protection. If an ISA is part of FSCS your eligible deposits are protected up to a value of £85,000 per person. Because of the kind of investments held in a IFISA, unlike other types of ISA, your money is not covered by the FSCS. So if the company you’ve invested through goes out of business, you probably won’t get your money back.

• Your borrower may not pay your money back (where the investment includes a loan). You might have the potential to earn more, but there's a chance that the borrowers won't repay your money. Often your cash will be spread across multiple loans to reduce risk.

• It can take a long time to withdraw your money. If you need your money easily accessible, this probably isn’t the account for you

As with a cash or stocks and shares ISA, you can open and pay into as many IFISA per tax year as you like, and the standard £20,000 ISA allowance applies to the IFISA/any other ISAs you pay into in the tax year.

What’s a Junior ISA?

A Junior ISA (JISA) is an ISA for under 18s. It can be opened by a parent, family member, or legal guardian if the child is under 16, or the child can open it by themselves if they’re between 16-18.

Just like the adult versions of these accounts, Junior ISAs can be either cash or stocks and shares ISAs.

The annual ISA allowance for Junior ISAs is lower, at £9,000 per tax year, but they offer the same tax-efficiency benefits as their adult ISA equivalents.

The money held in a Junior ISA is managed by the parent or guardian, but the money belongs to the child. The money paid into a Junior ISA doesn't affect the parent's ISA allowance, as it's separate. Kids can take control of the account when they’re 16, and can withdraw the money once they’re 18. So bear in mind that if they spend it all on a birthday trip to Ibiza, there’s technically nothing you can do about it! So when you're setting up an account for your kids, it's a really good idea to talk to them about the value of money, so you feel confident they'll put it to good use.

You can’t have a Junior ISA as well as a Child Trust Fund, so if you want to open a JISA and you already have a Child Trust Fund, you need to transfer the trust fund into the ISA. If you're not sure if you have a Child Trust Fund, you can find out more here.

Read more about Junior ISAs

This isn't financial advice or personalised to you, and we're not recommending or suggesting you take any particular action. If you're in any doubt about what's right for you, then speak to an authorised financial advisor.

Tax treatment depends on individual circumstances and may change in the future.

The value of your investment can go up and down and you could get back less than you put in.

Interested in opening an ISA? At Monzo we offer cash ISAs and stocks and shares ISAs. Find out more about saving and investing with Monzo.