What are the different types of ISA?

Whether you’re thinking about opening an ISA or want to know whether the ISA you currently have is best suited to your needs, here’s everything you need to know about the different types of ISAs available to you.

Standing for Individual Savings Account, an ISA lets you earn tax-free interest on any funds you deposit, meaning they can be a great way to grow your savings. There are four main types of ISA available, with each having their own pros and cons depending on your circumstances.

Cash ISAs have the most similarities to a regular savings account, so named because your cash sits in the account and, depending on the terms of the account, is readily available to you. The main difference from a regular savings account is that with a cash ISA, you won’t be taxed on any interest your savings earn. There are multiple types of cash ISAs available to choose from. While on the surface they all do the same thing, cash ISAs can differ based on the amount of interest they pay, and the amount of notice you need to give to make a withdrawal from the account.

Easy access ISAs are the simplest type of cash ISA available as they allow you access to the money in your account at any time, so you can normally make an unlimited number of deposits and withdrawals without penalty (though it’s worth noting that some do come with restrictions). Most easy access ISAs have variable interest rates, meaning that the rate you are offered at the start can both increase and decrease over time.

If you have funds available that you know you won’t need to draw upon unexpectedly, it may be worth considering a fixed rate ISA. This type of cash ISA locks away your initial deposit for a specified length of time and comes with a fixed interest rate for that period. Terms can range from one to five years, with higher interest rates typically coming with longer terms. Making withdrawals from a fixed rate ISA before the term expires will often result in an interest penalty and the ISA may be closed. Because of this, it’s important to only put away cash that you’re sure you won’t need access to in the short-term in order to reap the most reward.

Other cash ISAs available include notice ISAs, which can benefit from higher interest rates than an easy access ISA while also allowing you greater freedom to make withdrawals from the account than a fixed rate ISA, so long as you provide notice. Notice periods for these accounts can vary, but typically fall somewhere between 30 and 180 days. Penalties will still be applied for making earlier withdrawals, and usually fall in line with the notice period. Meanwhile, if you want to put away smaller amounts into an ISA each month, you may want to consider a regular savings ISA. A regular savings ISA pays a higher rate of interest in return for you promising to make a minimum deposit on a regular basis, but a penalty will be applied for missing a payment or withdrawing funds early.

While cash ISAs hold onto your money and pay interest at a set rate, with a stocks and shares ISA (sometimes called investment ISAs) the money you deposit is invested into funds, bonds, and/or shares without having to pay any income or capital gains tax on any growth. A stocks and shares ISA is not without risks though. You can hope to increase your savings by taking advantage of growth in the stock markets, but it’s important to remember that there’s potential for your pot to decrease depending on how your investments do. As with cash ISAs, the Financial Services Compensation Scheme (FSCS) will typically protect up to £85,000 of your investment if your stocks and shares ISA provider collapses, but this protection doesn’t cover you should you make a loss on your investment. This type of ISA may only be suitable if you can afford to take risks with your money and are comfortable having a long-term outlook.

An Innovative Finance ISA (IFISA) is a form of peer-to-peer lending (P2P) where the money you deposit is lent to individuals and small businesses or put towards crowdfunding investments for an agreed length of time. After the time period has passed, you would be looking to earn tax-free returns on your initial investment. It’s worth remembering that returns aren’t guaranteed though, and that your capital is at risk. Unlike with a stocks and shares ISA, because an IFISA contains P2P loans, your money will not be protected under the FSCS should your provider collapse.

Launched in 2017, the Lifetime ISA (LISA) was created as a way of helping you to either save for your first home or to put away money for your retirement. It works by the Government giving you a 25% bonus on any deposits made into a LISA, up to a maximum of £1,000 a year. You’ll then earn tax-free interest on both your savings and the Government bonus, compounded either monthly, annually or on anniversary. Opening a LISA does come with some restrictions. You must be aged over 18 but under 40 to qualify. The first payment into a LISA must be made before you turn 40, and you can put away up to £4,000 a year until you turn 50. Once you turn 50, the Government bonus will stop but your savings will continue to gain interest. Funds can only be withdrawn from your LISA if you’re buying your first home, are aged 60 or over, or are terminally ill with less than 12 months to live. Otherwise, you may face a penalty for early withdrawal.

When using your LISA to buy your first home, the property value mustn’t exceed £450,000. It sounds self-explanatory, but in order to be a first-time buyer you can’t have already owned a property anywhere in the world, including commercial properties and buy-to-lets. If you’re looking to buy a house with someone else, it’s possible for both of you to use your LISAs to buy a property together, so long as you’re both first-time buyers. Funds from the ISA are used at exchange of contracts but should the purchase of a property fall through, they will be returned to your account.

If you plan to use a LISA to save for retirement, you can access funds in your account any time from the age of 60. You can then use the money you’ve saved in any way you want, though the LISA is designed to support people throughout their retirement. While you can withdraw the funds as a single lump sum should you wish, by making partial withdrawals to supplement your income any money left in the account will continue to gain interest and will remain tax-exempt.

Yes, you can have more than one ISA. Each tax year (6 April to 5 April) you’re entitled to pay into one of each of the four types of ISA discussed above (i.e. one cash ISA, one stocks and shares ISA, an IFISA and a LISA). It’s important to be aware of the annual ISA allowance, which limits the amount of money you can pay across all your ISAs.

The ISA allowance is the maximum amount of money you can save into one ISA or across multiple ISAs each tax year. The ISA allowance currently stands at £20,000. You can split this allowance however you wish, so long as you don’t exceed it. For instance, you may choose to plough all your allowance into one ISA, or you could split it across any combination of the four different types of ISA.

After reading this guide, maybe you feel that your current ISA is not the best for your needs. Or perhaps, having looked at our best ISA rates table, you’ve found that another provider can offer you better rates. In either instance, it is worth checking out our guide to transferring ISAs.