ISAs are an invaluable resource for anybody to have, especially while saving for a rainy day. However, unless you’ve spent some time digging into the specifics of ISAs, you’re unlikely to have a solid grasp of exactly what they are, the benefits of them, and how they work.
Whether you’re just curious about ISAs, wondering how much you can put in per year, or if you’re thinking about opening one soon, here, we’ll detail everything you need to know to get the most out of your own ISA.
First things first: what is an ISA?
ISA is an acronym for Individual Savings Account. Although they sound similar, ISAs differ to other kinds of savings accounts because ISAs offer tax-free interest on your savings.
As a quick recap, savings accounts allow you to earn interest on the money that is deposited within them.
The Personal Savings Allowance means:
At which point, having an ISA becomes especially beneficial.
Here we’ll explore the inner workings of an ISA, to give you a better understanding of how they operate.
One type of cash ISA is a limited access ISA – for those who can confidently keep money away without accessing it, a limited access ISA can be beneficial. If you withdraw less than once (or twice, product dependent) in the year, you reap the benefit of a higher interest rate on your remaining savings.
If you’re looking to open multiple cash ISAs, there’s good news. Provided you meet the eligibility criteria for whichever account you’re applying for, there’s no limit to the number of ISAs you can have open at any one time (except for the Lifetime ISA, which you can only pay into one each year). However, there is a limit on how much money you can deposit per year.
If you do have more than one ISA, just be sure to stick to the deposit restrictions below.
ISAs have a limit on how much that can be deposited into them. This is applicable to all types of ISAs opened within the UK, but some have different limitations.
Everyone in the UK can deposit up to £20,000 in an ISA every tax year. Junior ISAs have a limit of £9,000.
This money can either be invested entirely into one account or split among the four different types.
The only caveat to this is that Lifetime ISAs have a maximum deposit of £4,000 each year.
So, if you’re wondering “can I pay into two cash ISAs?” The answer is yes.
If you’re thinking of transferring an ISA or combining two of the same types into one account, you’ll be pleased to hear this does not contribute towards your annual ISA allowance. After transferring, individuals can continue to deposit and withdraw funds, provided they stay within their limits.
ISA transfers do not count towards your annual allowance. For example, you could transfer an ISA worth over £20,000 at the beginning of a tax year. You could then contribute up to £20,000 to your new ISA that year.
In the majority of cases, it is perfectly fine to withdraw money from an ISA. The only thing to consider with this would be the terms agreed between yourself and your bank.
If you have a fixed-term ISA, for example, your bank may penalise you for withdrawing funds before the fixed term comes to an end. The most common penalty for this is lost or lower interest payments meaning your money won’t be working as hard as it was before.
The same also applies to a Lifetime ISA. As these accounts have a specified purpose, so using the money for anything else can mean giving up the 25% top up bonus applied by the state. Before you withdraw money from your ISA, be sure to carefully review the terms of your account.
When it comes to interest, ISAs are fairly straightforward. Just like you would have with a personal savings account, an ISA offers the account holder an extra amount of money depending on how much is being kept within the account.
This interest is worked out per-annum and rates are determined by a range of different factors including marketing competition, economic conditions and the current base rate. Meaning that, if the money in the account was kept in place for 12 months, the stated interest would be applied.
The exact amount of interest earned can change depending on additional contributions and withdrawals throughout the year (if your ISA allows for such a thing) and whether you have chosen a fixed or variable account.
For example, if you choose a fixed-rate cash ISA, you’re guaranteed the interest rate outlined at the start. However, if you opt for a variable deal, the rate of interest could go up or down – usually mirroring the UK base rate.
You can choose for interest to be paid monthly, annually, or on the maturity of any agreed fixed term into your ISA or a chosen current account.
ISAs are built to be tailored for multiple different uses.
We’d encourage you to review the options available to you and what exactly your goals and expectations are from such an account. Savvy savers will see the most benefit from an ISA after reaching their tax-free interest accrual. At which point, an ISA can be opened to save in a more tax efficient way.
Now that you’re fully clued up on what ISAs are and how they work, all that’s left to do is take a look and see if opening an ISA could be the right thing for you.
We can help you get started thanks to our range of Cash ISAs. From a Fixed rate ISA to our Easy access ISA, start your savings journey with Aldermore, today.