30 May 2017

Do you know your LISA from your JISA?

If you're thinking of opening an ISA, we provide a summary of the five variants currently available to help you decide what suits you best.

With the Lifetime ISA being introduced from 6 April 2017 we now have five variants of the ISA. This article summarises the ISAs currently available, including the limits at the time of writing.

ISAs are open to UK residents and are generally used as a vehicle to shelter income from income tax and also to protect growth in the value of an investment from capital gains tax.

1. Basic ISA (Cash, stocks and shares)

This was the first ISA to be launched, however it’s in a slightly different guise now and the amount individuals are able to invest in a single tax year has increased.

The ISA annual investment limit increased to £20,000 from 6 April 2017, meaning an individual can invest up to £20,000 in a combination of cash and/or stocks and shares. For example, you could open two ISAs in the one year, using one ISA to invest £10,000 in cash and the second ISA to invest £10,000 in stocks and shares.

Please remember that money invested in ISAs opened in previous tax years (using earlier year’s allowances) can be transferred into a new ISA account using specific transfer forms (so as not to lose the ISA status). This would be of particular relevance where an ‘old’ ISA has a particularly low interest rate or higher share dealing platform fees.

2. Junior ISA (JISA)

The annual investment limit for the Junior ISA (JISA), which is aimed at families who want to save for their children, increased to £4,128 from 6 April 2017.

As you may be aware, children are entitled to the personal tax free allowance, which is currently £11,500. So, you may be questioning why you might need an ISA if the income arising in a non-JISA account for a child is less than the personal allowance. The reason is that any income arising on an investment made by a parent for their (minor) child in excess of £100 each tax year in a non-JISA account will be taxable on the parent.

As with the basic ISA, the funds can be held in a combination of cash and/or stocks and shares.

Control of the JISA passes to the nominated child when they reach the age of 16, but they cannot make any withdrawal until the age of 18.

It is worth noting that the JISA replaced the old Child Trust Fund (CTF). Any child born between September 2002 and January 2011 who has a CTF set up can either continue paying into this or convert it into a JISA.

3. Innovative Finance ISA (IFISA)

The Innovative Finance ISA (IFISA) was introduced by the Government on 6 April 2016 to allow individuals to use some, or all, of their annual ISA limit (£20,000) to lend funds through the growing ‘Peer-to-Peer’ lending market. Doing it this way means they won’t be subject to tax on the money invested, as savings interest and investment gains are not taxed.

In general, the IFISA offers much higher rates of interest than the traditional ISA, but the associated investment ‘risk’ is often much higher.

4. Help to Buy ISA

In an effort to assist first time buyers, the Government introduced the Help to Buy ISA in December 2015, which sees the Government ‘top-up’ your Help to Buy ISA savings by 25% (up to £3,000). If you are buying with someone else who is also a first time buyer they can also get a Help to Buy ISA, with the money saved and Government top-up used to fund your deposit.

The funds must be held in cash (as opposed to stocks and shares or a combination). In addition, in order to qualify, the home you are looking to buy must:

  • have a purchase price of less than £250,000 (or £450,000 in London);
  • be the only home you own;
  • be where you intend to live.

The scheme allows you to make an initial payment of £1,200 to be saved, and thereafter an additional £200 can be paid in each month. When it comes to purchasing the home, the Government will top-up the amount saved by 25% of the investment made at the time, with your solicitor submitting the application to the Government for the top-up.

The limit on the Government top-up is £3,000, which would equate to the individual saving £12,000 over a period of almost five years.

If you plan to take advantage of this scheme, it’s important you notify your solicitor when purchasing your first home that you have a Help to Buy ISA and that they understand the process for applying for the top-up.

5. Lifetime ISA (LISA)

The Lifetime ISA (LISA) is the new kid on the block, being launched on 6 April 2017.

A LISA can be opened by those aged  between 18 and 40, with individuals able to continue saving into the LISA until the age of 50. The annual investment limit is £4,000 per tax year and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

As with the basic ISA, the funds can be held in a combination of cash and/or stocks and shares.

The government bonuses are withdrawn as soon as the money is taken out the LISA, unless the reason for withdrawing the money is because you are:

  • purchasing your first home;
  • aged 60 or over;
  • terminally ill, with less than 12 months to live;

The conditions in relation to ‘purchasing your first home’ are different to that of the Help to Buy ISA, namely:

  • the property must cost £450,000 or less;
  • the property is purchased at least 12 months after you open the LISA;
  • you use a solicitor to act for you in the purchase (the ISA provider will pay the funds directly to them);
  • you are buying with a mortgage.

If you are purchasing the house with someone else, they can also open their own LISA and it is possible to transfer savings from a Help to Buy ISA to a new LISA. You only get the 25% top-up on one or the other though, not both!

First time buyer?

For first time buyers, the pros and cons of both the Help to Buy ISA and LISA should be carefully considered. Less money can be saved in a Help to Buy ISA, and the savings must be in cash (as opposed to cash and/or stocks and shares in a LISA). In addition, the property cost limit in a LISA is higher.

Saving for retirement?

If you are looking to save for retirement rather than a first home, you might be interested in reading our previous article, which compared the LISA and pensions. As we outlined, saving into a pension may be more desirable than using a LISA, particularly where an employer matches employee contributions, however a pension can also be used in combination with a LISA.

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