What is an ISA?

The straightfordable way to save for the future

The world of finance can sometimes be a little confusing. That's why we've put together this handy article to help answer your question, what is an ISA?

Why should I save or invest?

Putting money aside regularly will help you get the things you want in life. Whether you're saving for a rainy day or something special, choosing a goal is up to you. Getting in to a regular saving and investment habit will help you achieve it more quickly. Here are a few of the most common reasons for putting some money aside:

  • Retirement
  • Help children with house deposit
  • Unexpected emergency
  • Rainy day
ISA information

What is an ISA?

ISA stands for Individual Savings Account and is a tax efficient way to save and invest for the future. There are two main types, a Cash ISA and a Stocks and Shares ISA. Anyone who is a UK resident can open a Cash ISA (if they are 16 or over) and a Stocks and Shares ISA (if they are 18 or over) in each tax year or top up existing ISAs up to the annual Government ISA allowance, which this tax year is £15,240.

What is a Cash ISA?

A Cash ISA is a savings account that allows you to put money aside tax free. This means that, unlike a regular bank or building society account, the tax-man can't touch any interest you earn on your savings.

How much interest you earn depends on which Cash ISA you choose. Some Cash ISAs can offer a higher rate of interest than normal savings accounts and you'll get back at least what you paid in plus any interest earned.

Cash ISAs are usually seen as suitable for short to medium-term savings goals - if you want to put some money away for a holiday, home improvements or car repairs for example.

They're basically bank accounts where you earn interest on what you put aside tax-free. If you're just saving for a year or two, they usually fit the bill.

Many Cash ISAs are easy access. However some require you to give notice, for example 30 or 60 days, before withdrawing funds. With some Cash ISAs, where the interest is fixed for a set time, you may be penalised for withdrawing your savings early.

Types of ISAs

What is a Stocks and Shares ISA?

A Stocks and Shares ISA can invest tax-efficiently in much more than the name suggests. Instead of putting money in to a savings account, it can go in to a range of investments like shares, property, cash and bonds.

The value of the investments can go down as well as up and you could get back less than you have paid in. However, just like a Cash ISA, the tax-man can't touch what your investment earns (other than tax on dividends from UK shares).

Stocks and Shares traditionally offer better potential returns over a longer period. You can usually get your money out when you need it with a Stocks and Shares ISA, but in order to try to ride out the ups and downs of the stock market, they should be considered for medium to long-term goals of at least five years, but ideally ten or more. For example, saving to help your children with the deposit on their first home or for your retirement.

Because Stocks and Shares ISAs are investment based, it can take longer to start seeing results, but the returns may be higher than a cash investment. Don't forget, the value can go down too and your original investment is not guaranteed. You could get back less than you have invested.

Watch our video on Stocks and Shares ISAs

How you can use your ISA allowance

Each tax year the Government gives you an ISA allowance. You can invest in either a Cash ISA or a Stocks and Shares ISA or a combination of the two. You can only actively pay in to one Cash ISA and one Stocks and Shares ISA each tax year.

ISA allowance

Your questions answered

How much can I put in my ISA each year?

Each tax year, to encourage saving, the Government gives you an ISA allowance. If you miss the annual ISA deadline there's no way of getting your allowance back, so it's important to make the most of it each year. In this tax year you can invest up to £15,240 in either a Cash ISA or a Stocks and Shares ISA or a combination of the two. You can only actively save and invest in one Cash ISA and one Stocks and Shares ISA each tax year. If you haven't used your ISA allowance by the end of the tax year, you will lose your entitlement to it.

Can I move money between ISAs?

You can transfer money from a Cash ISA to a Stocks and Shares ISA and vice versa, although some restrictions may apply. Just make sure you don't withdraw your money first. You should contact the new provider to arrange the transfer.

Can I have both a Cash ISA and a Stocks and Shares ISA?

Yes, there's nothing stopping you having both a Cash ISA and a Stocks and Shares ISA, as long as you keep within the annual Government limits.

How can I pay into an ISA?

You can pay into an ISA with regular payments, a lump sum payment or a combination of the two.

No advice has been provided by SunLife

If you are in any doubt as to whether a savings or investment product is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.