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What are the different types of ISA and what can they do for you?


ISA stands for Individual Savings Account and there are different types of ISAs. Each one has its own specific benefits that can help you save money on a variety of things. In this blog post, we will discuss the different types of ISA and what they can do for you!

There are four main types of ISAs: Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs.

What is a Cash ISA?

Cash ISAs are the most popular type of Individual Savings Account. With a Cash ISA, you can save up to £20,000 tax-free each year. The money you save in a Cash ISA is not subject to income or capital gains tax. This makes Cash ISAs a great way to save money for your future without much risk involved.

Advantages of a Cash ISA

  • Low risk
  • Accessible (subject to any fixed term)
  • Suitable for those with short-term savings needs
  • No, or low, minimum contributions

Disadvantages of a Cash ISA

  • Low return
  • Difficult to beat inflation
  • Limited tax benefits
  • Maybe better placing cash in non-ISA accounts and use savings allowance instead

What is a Stocks and Shares ISA?

A Stocks and Shares ISA is a type of Individual Savings Account that allows you to invest in stocks and shares. With a Stocks and Shares ISA, you can invest in a wide range of investments, including shares, funds, and bonds. You can also invest in a Stocks and Shares ISA through a self-invested personal pension (SIPP).

Advantages of a Stocks and Shares ISA

  • Higher potential returns
  • Can choose a level of risk
  • Generally quite accessible
  • Can access investments from a wide range of managers through one ISA

Disadvantages of a Stocks and Shares ISA

  • Can be volatile
  • Income and growth are variable
  • Capital at risk. Even “low-risk” investments can lose money
  • Charges apply to manage an ISA
  • Investments can be complex and difficult to choose without advice

What is an Innovative Finance ISA?

An Innovative Finance ISA is a type of Individual Savings Account that allows you to invest in peer-to-peer (P²P) loans. With an Innovative Finance ISA, you can earn interest on your investment without paying any income tax or capital gains tax. This is the type of savings account used by FOLK2FOLK to make your peer-to-peer investments tax efficient.

Advantages of a Stocks and Shares ISA

  • Stable and more predictable returns
  • Generally quite accessible
  • Alternative investment type to a Stocks and Shares ISA
  • Charges are usually taken before interest is paid
  • Loans are often asset-backed

Disadvantages of a Stocks and Shares ISA

  • Single asset type (loans)
  • Capital is at risk
  • Focuses on producing an income
  • Returns are reliant on the borrower’s ability to make repayments

What is a Lifetime ISA?

A Lifetime ISA is a type of Individual Savings Account that allows you to save for retirement. With a Lifetime ISA, you can save up to £20,000 each year and receive a 25% government bonus on your savings. The money in your Lifetime ISA can be used to buy your first home or to save for your retirement.

Advantages of a Stocks and Shares ISA

  • 25% government bonus
  • Can be held as cash or as stocks & shares
  • Commonly used for house deposit savings
  • Useful for retirement planning when pension allowance has been fully utilised or reduced

Disadvantages of a Stocks and Shares ISA

  • Restricted to a maximum of £4,000 contribution per year
  • Accessing funds before age 60 (unless for house purchase) results in losing the bonus and suffering a 25% penalty
  • You can only apply if you are 18-39 years old
  • Contributions must stop at age 50
  • Only 7 stocks & shares providers and 5 cash providers

Things to consider with an ISA

  • The interest rate. This will influence the amount of return you make on your savings. Note that after 12 months, initial high introductory rates are frequently reduced—so this could be a good time to move your ISA funds to a higher-paying account
  • What kind of account is it? Is it an easy-access, fixed- or regular-saver ISA? Choose which type of ISA best matches your needs, as well as the amount and speed of return you desire.
  • Is there a better ISA alternative? You may also consider an Innovative Finance ISA, which allows you to invest in P2P loans. While there might be a greater return, there is also the risk to your money (the value of investments can go down as well as up) while investing.
  • You can only open one cash ISA each year. Before you make your decision, consider it carefully. You may also invest in a stocks and shares ISA or an innovative finance ISA in the same year; however, your total ISA savings can’t exceed £20,000 in any tax year.
  • Know when the ISA deadline is. The tax year ends on 5 April. If you don’t invest before then, your tax-free allowance for the year will be gone as any unused allowance can’t be carried over

About the FOLK2FOLK Innovative Finance ISA

Our Innovative Finance ISA (IFISA) enables you to use your annual Individual Savings Account (ISA) allowance to earn tax-free interest. You can receive monthly tax-free interest of typically 6.5% p.a. and invest your full 2021/22 ISA allowance of £20,000.

Click here to find out more about our Innovative Finance ISA and how it works

Now that you know the different types of ISAs and what they can do for you, it’s time to start saving! If you’re not sure which ISA is right for you, speak to a financial advisor or use an online tool to compare the different options.

What ISA is right for you?

We were joined by Adam Deacon, the Senior Financial Planner at Azets Financial Planning, and we break down the different types of ISAs and help you figure out which one would be best for your financial situation.

Watch Webinar Here

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