What is the best ISA to have in 2020, and are they even still worthwhile? Our experts answer your questions here. ⭐ISA 2020 ⭐Financial Tips
The new year is often a good time to get your finances in order, with many having resolutions to get on top of their own personal financial affairs. There is a chance to start the new year afresh and get to grips with your money.
We are also coming off the back of one of the most expensive months in the year. Many get swept up in December’s festivities and spend more than usual on gifts, parties, and food. So, as the dust settles on another year, many of us may be feeling a financial hangover and feel the need to sort out our finances.
Part of this includes taking a look at existing savings accounts and seeing where you could better place your money. In order to properly “make your money work for you”, you need to be aware of where it is placed and what you are getting back.
This is why our experts have compiled a short guide in relation to ISAs in 2020, to help you decide whether an ISA is for you and, if so, which ISA is the perfect fit.
What Is An ISA?
An ISA, or an individual savings account, is a particular type of savings account that allows people to save money and avoid paying tax on the interest you earn, regardless of your income. The scheme was introduced in 1999 as a way to encourage people to save money.
There is a limit as to how much individuals can save tax-free in any given year. For example, for 2019/20 the ISA limit is £20,000. The all-important date for savers to get as much tax-free interest as possible is 5th April 2020, which is when the financial tax year ends.
If you do not use up this ISA allowance, you cannot carry it over into a new financial year, so it is worth saving as much as you can between now and April.
Individuals can only open one Cash ISA per year, one stock and shares ISA per year, and one IFISA per year. You can have these accounts open simultaneously, and you can invest up to £20,000 per year spread over the three.
What are the Different Type of ISAs
There are four types of ISA:
- Cash ISA
- Stocks and Shares ISA
- Innovative Finance ISA (IFISA)
- Lifetime ISA
Cash ISA
The most common of these ISAs is the Cash ISA. This is essentially a standard savings account, but you won’t pay tax on any interest you earn. To make matters a little more confusing, within this category there are more sub-categories. Cash ISAs can be:
- Easy Access – Lets you access your money whenever you need without incurring a penalty
- Regular Saver – Gives you a fixed rate of interest, as long as you make regular deposits each month
- Junior – Allows you to save a maximum of £4,368 a year, tax-free, for your child if they are under 18 and living in the UK. This becomes an adult ISA when they turn 18.
- Notice – Often gives you a better interest rate, but requires you to tell your bank when you want to withdraw your money in advance
- Fixed Term – This keeps your money for a whole term, usually between one and five years. Also gives you a fixed interest rate
Stocks and Shares ISAs
The Stocks and Shares ISAs allow savers to invest money into the stock market, meaning that you could actually lose your money. This ISA would normally be managed by a provider, due to needing to track the performance of stock markets, like the FTSE 100.
Savers have to trust their bank to invest their money wisely, but, as with any shares, prices can increase and decrease over the year, and you are not guaranteed a return on investment. Having said this, the reward is potentially also greater.
Innovative Finance ISA (IFISA)
This ISA is relatively new to the market, having been launched in 2016. It is definitely one to look out for in 2020, as it is increasing in popularity.
This is the only ISA that allows savers to invest money without saving cash or investing in the stock market.
This ISA is based around peer-to-peer lending (P2P). The saver’s money is borrowed by either a business or an individual who is looking for a better interest rate, cutting out the middleman of the bank.
The interest rate that you earn with this ISA is based on the borrower’s credit history. If they have a good credit history, you will earn less interest. If they have a bad credit history, you have the opportunity to charge more interest.
There is a certain level of risk, however. If the business goes into administration or the individual defaults on the loan, you may be left with less money than you started with.
Lifetime ISA
The Lifetime ISA is also relatively new and is becoming popular among savers due to its returns. Individuals can save up to £4,000 a year into this ISA, either as a lump sum or in instalments. The Government will then add a 25% bonus on top of this sum.
This means that if you save £1,000 throughout the year, the Government will add £250, leaving you with £1,250. And this amount is before any interest.
The bonus is paid monthly, with the bonus calculated on a month-by-month basis depending on what is in the account.
This ISA is also the new spiritual home of the now-defunct Help To Buy ISA, which ended on November 30th 2019. Lifetime ISAs also offer a 25% bonus for first-time buyers.
Who Can Open an ISA?
In order to open an ISA, you must be:
- 16 or over for a cash ISA
- 18 or over for stocks and shares or innovative finance ISA
- 18 or over but under 40 for a Lifetime ISA
- A resident in the UK
- A Crown servant (for example diplomatic or overseas civil service) or their spouse or civil partner if you do not live in the UK
You also cannot hold an ISA with or on behalf of someone else, unless it is a junior ISA for a child living in the UK under 18.
What Were the ISA Allowances for 2019/20?
The tax-free allowance for 2019/20 did not increase from the previous year. It was set by the Government at £20,000.
If you have more than one different ISA, the value of the accounts combined must not exceed £20,000.
The Junior ISA is a little different. This did increase in 2019/20 from £4,260 to £4,368 to fall in line with inflation.
The deadline to utilise the ISA allowances ends at midnight on 5th April 2020, as this is when the financial year ends. If savers miss this deadline, they will have missed the opportunity to fully benefit from the tax-free allowance.
When is the New ISA Allowance Announce for 2020/21?
At the end of each tax year, the ISA allowance is reset by the Government. This is why the end of each tax year is also known as the ISA deadline.
In the UK, the tax year runs from 6th April to midnight on 5th April. However, in the past, we are usually told what the allowance is going to be before the end of the tax year.
There is currently no date set for the announcement of the ISA allowance for 2020/21.
Is an ISA Worth it?
Cash ISAs have taken a hit in the past couple of years, with interest rates slowing and falling below inflation. They have also been hit by the introduction of a Personal Savings Allowance, which allows savers to earn tax-free bonuses without the need of an ISA. For example:
- If you are a basic rate taxpayer, your personal savings allowance is £1,000
- If you are a higher rate taxpayer, your personal savings allowance is £500
Many cash ISAs give you lower interest than the current inflation rate, which is 1.7%. This actually means in real terms that your money is potentially shrinking.
Having said this, whether to put your money into an ISA in 2020 is all dependent on individual circumstances. There are positives about the tax-free bonus offered. Many people are not experienced investors and want to have a simple way to earn a little bit of money.
In addition to this, in a financial market where the mis-selling of financial products is growing, savings in an ISA are protected.
Where you put your savings is dependent on your risk appetite. If you are willing to risk your investment for potentially more reward, then a Cash ISA may not be for you. If, however, you want a guaranteed tax-free bonus, at a cost of a lower interest rate, then Cash ISAs may be perfect.
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