If you want to save money an individual savings account, also known as an ISA, is a great place to start.
There are a fair few rules surrounding ISAs so it’s worth knowing a few things before you open one or start changing providers.
It’s tax free
It’s not often the government give us a free ride.
However, with the ISA, you’re able to earn interest and not have to pay any tax on it.
So, you can essentially make savings versus other savings accounts as you won’t pay any interest on cash in an ISA. You also won’t need to pay tax on income or capital gains from investments in an ISA.
There’s not just one to choose from
When it comes to ISAs there are a few options for you to choose from.
First up, you have the cash ISA, which doesn’t usually get you a good return, but it’s a safe bet.
Depending on what you’re saving for, and if you want to see higher interest rates, you may want to look into other ISAs.
A Stocks and Shares ISA comes with more risk than a cash ISA, but you could see higher returns. They invest your money in stocks, bonds, funds and some other investments.
It’s a longer-term way of investing, so you may want to look to invest your money over a longer period (5 years plus) to make sure you ride out any movement in the market.
With an Innovative Finance ISA you’re able to invest with peer-to-peer lending. The interest rate you get will be far higher than a cash ISA, but there will be more risk involved.
The Lifetime ISA is slightly different.
You can either use a Lifetime ISA to save for your first home or you can use the money later in life. There are also age limits; you need to be at least 18, but need to be under 40 to open a Lifetime ISA.
There are also caps. You’re only able to put up to £4,000 (correct as at 2018/19) into a Lifetime ISA each year up to the age of 50. The government will give you a 25% bonus on your savings, up to £1,000 a year.
If you need to access the money early, you have to pay a 25% charge to withdraw your savings unless you are using it to buy your first home, you’re over 60 or you are terminally ill and have less than 12 months to live.
You can only pay into one of each
While you’ve got lots of choice, you need to pick carefully.
Each tax year, you are able to open a new ISA, but you can put money into one of each kind (so you could have a cash ISA, a stocks and shares on and an Innovative Finance ISA)
In the same year, if you see a new ISA that pays better interest rates, you can choose to move your ISA over.
However, you must close down your original ISA and transfer all the money over to the new one.
They’re not just for grown ups
Everyone should start saving and investing as early on as possible – and this can start when you’re a baby!
Kids are able to open their own ISAs and can choose from a cash Junior ISA or an investment Junior ISA.
Under 16s are able to have one of each, but anyone over 16 could have a Junior ISA plus an adult cash ISA. When you reach 18, you’re no longer allowed to have a Junior ISA.
The same with an adult ISA, if there is a better deal elsewhere, you can change the account over, but you must transfer all the money out and close the old account down.
It’s all change
The amount you can save changes each year!
There is a cap on how much you can save (see the latest ISA rates) and you are not able to go about the maximum.
However, you are able to split the allowance across different types of ISAs.
So, you could save £10,000 in an Innovation Finance ISA, £6,000 in a cash ISA, and £4,000 in a Lifetime ISA – maximum £20,000 (for 2018/19).
At the end of the tax year, your ISA stays open and your savings will continue to be held tax free, for as long as you keep the money in your ISA account.
Naomi knows the burden of living on very little and became debt free by learning from past mistakes and following her own money saving tips and tricks.