Individual Savings Accounts, commonly known as ISAs, were originally introduced way back in April 1999, replacing Personal Equity Plans (PEPs) and Tax-Exempt Special Saving Accounts (TESSAs).
While the rules and savings limits have been tweaked somewhat over the intervening years, the standard ISA is, at heart, much the same product as it was back in 1999. In November 2011, the government introduced the Junior ISA to replace the old Child Trust Fund and 2015, 2016 and 2017 have all seen (or are about to see) the introduction of new forms of ISA in the form of the Help to Buy ISA, the Innovative Finance ISA and the Lifetime ISA respectively. All ISAs share the common features of tax efficiency and the fact that the annual allowance is given on a “use it or lose it” basis. In other words, although it may be possible to replace withdrawals made in the same tax year, once a given tax year is over, any unused allowance disappears with it. Apart from this, they all have significant differences.
The original product, can hold cash and or stocks and shares, provided that the latter meet the qualifying criteria. Cash deposits are subject to standard Financial Services Compensation Scheme (FSCS) protection, investments are subject to the relevant regulatory body. At current time, cash-only ISAs can be opened by individuals who have reached their 16th birthday, but any ISA with an investment component can only be opened by someone aged 18 or over.
Junior ISAs are opened by adults for children under the age of 18. At age 16, children can open a Junior ISA for themselves and since they can also open an adult cash ISA, there is scope for two years of intensive (pre-University) saving. Regardless of who opened the Junior ISA, at age 18, it becomes the full property of the person for whom it was opened.
The Help to Buy ISA
Introduced in 2015, the Help to Buy ISA is currently available to those aged 16 or over, who qualified as first-time buyers. Savers received a 25% government bonus on their savings, to a maximum of £3K. In other words, if they manage to save £12K themselves, they will have a total of £15K to put towards their new house. The scheme is due to close to new customers in 2019 and to end completely in 2029. It should be noted that the Help to Buy ISA has come in for heavy criticism because the bonus only applies if funds are used after completion rather than upon exchange. This essentially makes it impossible to use ISA funds towards a deposit.
Innovative Finance ISAs
These ISAs seem to have been largely overlooked by the financial press, possibly because they have such a restricted scope. They were created to allow peer-to-peer lending to be incorporated into the ISA platform, but at the point when they were introduced, the major platforms were all still waiting for accreditation.
The Lifetime ISA is due to launch in 2017 and in spite of its rather generic name, it is intended to be used to purchase a house and/or to finance retirement. The advantage of this form of ISA is that, it too, attracts a government bonus. Currently this is set at 25% of the saver’s contributions to a maximum of £1KPA up to the saver’s 50th birthday. In other words, there is a lifetime maximum of £32K. Unlike a standard ISA, where withdrawals can be made for whatever purpose the saver sees fit, with a Lifetime ISA, withdrawals before the age of 60 can only be made to finance a house purchase (or in case of terminal illness), otherwise the saver loses the bonus. Unlike with the Help to Buy ISA, however, funds are made available upon exchange and hence can be used for a deposit. After age 60, savers can access their funds as they wish.