What is an ISA?

An Individual Savings Account, commonly known as an ISA is a tax-free way to save. The interest earned on an ISA is tax-free, so any interest earned you get to keep.

How much can you put into an ISA?

The 6 April is the beginning of the new tax year, on this date you get a new ISA allowance. For the tax year 2019/20 the allowance is £20,000. This can be saved into any ISA you choose.

What types of ISA can I choose from?

Cash ISA

A cash ISA is just like a normal savings account, you just don’t pay tax on any interest you earn. Any interest you earn won’t count towards your personal savings allowance.

Protecting your money now by holding it as an ISA means that your money will retain its tax-free status.

There are two different types of cash ISA’s available from Paragon Bank.

Easy Access

This type of ISA gives you the ability to pay in and withdraw money at any point throughout the tax year. Some accounts will let you pay in and withdraw any amount, while others will place an annual limit on this. All ISA’s have an annual limit of £20,000 and this cannot be exceeded.

Fixed Rate

If you’re happy to tie your savings up for a while, then a fixed-rate ISA might be something to consider. This type of ISA locks away your savings for a set period, this is usually between one and five years. The longer you decide to tie up your savings, the better interest rate you usually receive. Paragon Fixed Rate ISAs’ allow access but with a 90-day loss of interest. This may reduce the capital balance if sufficient interest has not been earnt.

Other ISAs Available

Stocks and Shares ISA

An ISA can also be used for investing. This type of ISA is known as a Stocks and Shares ISA where you can invest in shares and bonds from various companies pooled into one investment and bonds and shares in individual companies. This type of ISA is usually managed by an online broker, fund management group or fund supermarket but can be managed by the ISA owner.

Many companies will charge a fee for you to open a Stocks and Shares ISA, some may even charge if you wish to change any investments, withdraw money or move it to another company.

Investing in a stocks and shares ISA is a higher capital risk than a cash ISA. If the shares you’ve invested in are not performing well, you could end up with returns of less than what you put in.

Innovative Finance ISA

An innovative finance ISA can involve anything from peer-to-peer lending to lending to businesses, crowdfunding and property. Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers.

Any interest obtained from lending money to businesses isn’t taxed. An Innovative Finance ISA can be a higher risk way to save, as you are lending money, there is a chance that the borrower won’t be able to pay. The risk can be lessened by spreading your savings across several loans.

Lifetime ISA

Lifetime ISAs were first introduced on 6 April 2017, you can save up to £4,000 a year into a Lifetime ISA and the state will add an additional 25% bonus. This bonus will be paid monthly until you reach the age of 50, you will also earn interest on this too.

The maximum bonus currently is £33,000, to reach this limit you would need to open a Lifetime ISA on your 18th birthday and contribute the maximum of £4,000 each year until you reach 50.

Help to Buy ISA

Help to Buy ISAs were first introduced in December 2015 for first time buyers only. In the first month you can save £1,200 and then £200 a month after. When you use the money for the deposit of your first home, the government will add a 25% bonus, up to a maximum of £3,000 to help you buy the property.

There is no wrong answer when choosing an ISA, all options are a good way to save. It just depends on your attitude to risk.

From what age can you start saving in an ISA?

UK residents can open a cash ISA from age 16 and a stocks & shares ISA or innovative finance ISA from age 18. To open an ISA with Paragon you’ll need to be 18.

Is it possible to switch ISA provider?

There are many possibilities when switching your ISA provider, read our transferring your Cash ISA blog to find out more.