How to choose the right Isa for you

There is an Jesus for every savior, but figuring out which one is right for you isn’t always easy.

The Issa family has grown over the years so now there are five different types to choose from.

They’ve been around for 24 years, with many new additions along the way. All Isas are designed to help you protect and grow your wealth. But each one will help you achieve different goals.

Build a rainy day fund

Cash Isas are perfect if you’re planting a little egg or want a home for the savings you’ll need for the next few years.

They work in the same way as a standard savings account. You open an account, pay some cash, and get interest in return.

As with all savings accounts, some Cash Isas accounts allow you to access your money whenever you want and without notice, while others lock your money in for an agreed upon period of time.

The only key different between Cash Isas and other savings accounts is that previously all interest earned is tax deductible.

Cash Isas have fallen out of favor in recent years and savers have been perfectly happy putting their money into a standard savings account.

This is because they were earning such small amounts of interest that few of them had to pay taxes anyway.

All savers enjoy a Personal Savings Allowance in addition to any Isas they have. Primary taxpayer savers can earn up to £1,000 in interest without paying tax, while higher rate taxpayers can earn up to £500. For most, this was enough.

But as interest rates start to rise, it’s now much easier to breach your personal savings allowance and Cash Isas have shown their value once again.

For example, if a higher rate taxpayer puts £20,000 into a standard savings account that pays 3 per cent, they could end up with a tax bill of £40. But if they save the same amount in Cash Isa, they don’t pay any tax.

> The best ISA cash rates are easy to access in our savings tables

Which Cash Isa is right for you depends on why you anticipate that you will need to withdraw your money.

If you might need it right away, it’s best if the account is easy to access. Best rates on these are currently just over three percent.

If you don’t need your money for a while, you might be better off getting a fixed rate cash out, which locks in your money for a few months or years.

The longer the repair takes, the better price you are likely to get.

However, the rewards for repairing for a few years aren’t much greater than a year or two, so you may not feel like it’s worth repairing for much longer.

Currently, you can get a one-year fixed-rate bond that pays more than four percent. The best five-year fixed rate pays Isas today about 4.2 percent.

Long term search to grow your wealth

Cash Isas are great for the money you want to get to in the next five years. But if you can keep your savings for at least five to ten years, ISA stock and stock options may be a better option.

During most periods, investing has proven to be more profitable than reaping interest on savings.

For example, if you had invested in a globally diversified portfolio of companies since 2005, you would have made about 10 percent annually, on average. If you had left your money in a savings account, you would earn about 1.5 percent annually, on average.

However, investing requires a certain mindset. With cash savings, you know exactly how much you have in the bank at any given time.

With investing, the amount you have will vary from day to day. You must be able to accept the fact that you could lose money and that there is an element of risk involved.

Beth McCarthy, 31, IT Quality Assurance Manager from Gloucestershire, started investing with Isa four years ago. “There are a few things I’m trying to achieve,” she says. “ I’m a saver and love knowing I’ve got a nice pillow behind me just in case. I also like to save on moving to the next house, whenever possible. Finally, build a comfortable retirement life.

Beth chose an Issa account over a public investment account so she could keep more of her proceeds to speed up the growth of her nest egg, rather than having to turn some over to taxpayers.

You can open and manage stocks and stocks ISA through the investment platform or through the bank. The best option for you depends on how much control you want over what you invest in, which offers the best value and the level of customer service you’ll need.

For a roundup of the options available from sister website This Is Money, go to thisismoney.co.uk/platform.

Don’t delay if you haven’t invested before. There is a growing number of options designed for novice investors. These do not require you to pick money, make predictions about the economy, or buy and sell stocks. You simply select how much risk you are comfortable with and how long you have to invest and then a portfolio is allocated to meet your needs.

If you are saving for your first home

A lifetime Issa can help boost your savings significantly if you’re working on your first home. There are two types – one that holds your savings in cash and the other that invests it.

The lifelong ISA can be very generous to some savers. However, there are very strict restrictions.

Matilda Littler, 27, a project manager from Hertfordshire, opened up to Isa for life to help save her first home. She gets a reward from the government on top of everything she can save herself.

She says: “I was given a life Isa for three years and got £3,000 in government bonus.” I also benefit from an interest rate on my savings of 2.85 per cent.

> Should you invest in a lifetime ISA to increase your home deposit?

Looking forward to your retirement

Annuities are likely to be the best option for most people who save for retirement. Workplace pensions in particular allow you to benefit from tax relief and contributions from your employer.

However, if you are self-employed and do not have a workplace pension – or if you want to supplement your workplace pension, a lifetime Isa can be useful.

They are designed to support retirement savings as the money saved can only be accessed for use on your first home or when you reach the age of 60.

Read our Lifetime Isa Guide for more information.

Saving for your child’s future

Kids can have their own Issa too. Little Issa (Giza) can be opened from birth until the child reaches 18 years of age.

Annual deposits are limited to £9,000 and the funds cannot be accessed until they are 18 years old. Protecting children’s money from taxes may sound strange but it is subject to the same tax rules as adults.

Additionally, if a parent deposits money into a child’s account and earns more than £100 of interest, anything over £100 will be taxed at the parent’s income tax rate.

Their savings injection into Junior Isa means they don’t have to worry about taxes today, and as their nest grows, you know it’ll always be tax-free.

Junior ISAS automatically converts to adult ISAS when the child reaches 18 years of age.

You can choose from cash or junior ISA investment or one of both. Because the funds are locked in for the long term, a Junior Isa investment offers a better opportunity for growth over nearly two decades.

“The main advantage of a Junior Isa is that any capital gains or dividend income on investments will be protected from taxes,” says Alice Jay, personal finance editor at wealth platform Interactive Investor.

“It could potentially save thousands over time, especially as the child becomes an adult and starts paying their own taxes,” she adds.

> The best Isas baby and junior accounts in our savings charts

for something a little different

The latest member of the Isa family is Innovative Finance Isa.

These accounts allow you to invest your ISA allowance in peer-to-peer (P2P) lending. This means that your money is loaned to borrowers who pay it back to you in installments plus a set amount of interest.

“Issa Financing Innovative” can offer much higher interest rates than “Issa Cash” rates.

For example, Crowd2Fund advertises an annual return on IF Isa of 11 percent.

But you risk much more. You may lose your money if the borrower defaults.

These Isas are not covered by the Financial Services Compensation Scheme (FSCS), which means that if a P2P company goes bankrupt, you may not get your money back.