Which is the Best ISA for you?

“What ISA should I get?” is a question that plagues many wannabe investors. If you’re looking for a simple, tax-efficient way to grow your money in the financial markets, a stocks and shares ISA, or investment ISA, is probably for you. Yet, with several different options available, how can you know the best ISA type for you? Here are five things to consider when deciding which ISA is for you.

It might seem like the ISA landscape is complex due to the fact that there are five types of ISA available. But when asking yourself, “What type of ISA should I get?” – the good news is that it’s quite simple. The best type of ISA accounts are essentially just savings or investment accounts that allow you to grow your money tax-free.

Ordinarily, when you sell non-ISA investments, you’d be required to pay tax on any profit you make above your annual capital gains tax allowance and on any income you earn above the dividend allowance. However, with investments put into one of the five types of ISAs listed above, you can forget about the taxman.

How much can you put in an ISA? You can put up to £20,000 per tax year shared across all five types of ISA accounts. All five handle tax efficiently – very efficiently. You don’t have to pay the taxman a thing. The only thing that might concern you is that if you leave ISA funds in your will, beneficiaries other than your partner or spouse may have to pay inheritance tax.

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What types of ISAs are there?

The different types of individual savings accounts available include the cash ISA, the stocks and shares ISA, the Lifetime ISA, the Innovative Finance ISA, and the Junior ISA. Each ISA account can play a part in reliable financial planning according to your individual circumstances and financial goals, but to apply for any of the types of ISA, you must be a UK resident.

Now, to help you find the best type of ISA for you, let’s explore the main types of ISAs and conduct a comparison of the best ISA accounts.

Cash ISA

Cash ISAs are tax-free savings accounts, and they are an attractive choice for savers looking to save for short-term needs and emergencies. A cash ISA is also an option if you’re looking to build a nest egg for retirement. However, interest rates are not as high as with some other types of ISA accounts, so it might not be the best ISA, but you can withdraw money early and replace funds from some cash ISAs, such as flexible cash ISA, without affecting your annual ISA allowance limit.

The Cash ISA interest rate is significantly lower than other ISAs, and that is because this type of ISA is less risky. If you are totally risk averse, and you’re asking, which is the best ISA for me? – the Cash ISA could be the best ISA for you.

As of April 2024, you can open multiple ISAs of the same type during the same tax year and partially transfer ISA funds between different providers if you so wish.

You can choose between easy-access cash ISAs and fixed-rate cash ISAs. Easy access cash ISA can be the best ISA for people who want instant access to their money, while fixed-rate cash ISA might be the best ISA for people who want short-term maturity and better interest rates. You do need to be aware, however, that the better interest rate comes at a price, and that price is having your money locked away generally for between one and seven years. If you do have to access your money, it will cost you.

If you are saving for your child’s education, the best ISA to choose would be the tax-free Junior cash ISA account. Cash ISAs are among the best ISA accounts for people with low-risk appetites. Different cash ISA providers offer different interest rates. Finding providers with the best ISA rates is essential if you want to open a cash ISA account.

Lifetime ISA

A Lifetime ISA could be the best type of ISA if you are saving for a deposit to buy your first home. It is also an investment option for people who want to save money for a long time. Adults under the age of 40 can open up a lifetime ISA. It allows them to invest money for up to 10 years and get a tax break when they withdraw the money. The government adds 25% to all investments made inside a LISA. With the government stimulus, this means that if you put £4,000 in your LISA every tax year, you’ll get a £1,000 tax-free bonus.

You can choose whether to invest in stocks and shares or cash via lifetime ISAs. If you are trying to get a deposit together to get your foot on the property ownership ladder, a Lifetime ISA is the best ISA for saving for a house. If, however, you are saving long-term for retirement, a stocks and shares LISA could be a better option.

However, the LISA is one of the two types of ISA that doesn’t conform to the £20,000 annual ISA allowance. The other one is the Junior ISA. You can only put £4,000 in a lifetime ISA per year and £9,000 in a Junior ISA.

But a LISA on its own, with its £4K annual allowance restriction, might not be the best ISA for retirement savings. In this case, if you’re asking yourself, “Which ISA is best for me? – the answer might be a stocks and shares ISA.

Innovative Finance ISA

Innovative Finance ISAs are a great way to invest in peer-to-peer lending or crowdfunding using your tax-free ISA allowance. There is a £20,000 ISA limit on an innovative finance ISA, but remember, if there are other ISAs in your name, they all contribute to this amount.

Returns on investments within an innovative financing ISA are higher than those within a traditional savings account, but there is no protection from FSCS financial compensation schemes, so if you are nervous about risk, this might not be the best ISA. It’s also important to remember that when investing in this type of account, it comes with more risk than a traditional savings account. Even the best innovative finance ISA is riskier than the other ISA accounts, so think twice.

Stocks and shares ISA

Stocks and shares ISAs are tax-efficient accounts that act as wrappers for your investments. You can invest in companies directly or through managed funds. Managed funds are pooled arrangements run by professionals who manage money for other people. This type of investment ISA puts your money in stocks, bonds, funds, and other assets. As a result, it is one of the best ISA options as it can be used to diversify investments.

Stocks and shares ISAs are riskier than some other types of ISA accounts, like the adult and Junior cash ISAs, but they offer higher returns. You can only open one account per tax year, but you can own several simultaneously. Also, you won’t be able to contribute to more than one stocks and shares ISA account at any time during the same year. But stocks and shares ISAs come with tax benefits. Income tax does not apply to the interest earned on bonds and other investment products held inside an ISA. If you keep your investment in stocks and shares ISAS, there’s also no need to pay tax on any dividends.

Also, you don’t pay capital gains tax when you put money into investment ISAs. Neither do you need to report your profits if you sell some of your investments. However, you do need to make sure you keep records of what you’ve bought and sold.

The annual allowance of £20,000 does apply to stocks and shares ISAs. In other words, each tax year, you can invest up to £20,000 into your stocks and shares ISA, or you can spread your allowance between the other types of ISA accounts if you prefer.

If you’re fed up with the returns available on savings accounts due to the low-interest rate applied, you might want to protect and grow your money in the financial markets. Of course, before starting investing, you should pay off any expensive debt, have three months of outgoings saved up in case of an emergency, and have a longer time horizon in mind, but once you begin, you can begin planning for the future with a degree of confidence. Investing for your retirement, for example, is an excellent choice.

Due to the fundamental dynamics of the financial markets and the types of ISA variations available, you need to be able to take on some risk if you want to grow your money for the future. If you’re looking to grow your money for something in the next two years, you’ll want to protect the value of your money in your chosen best ISA so you can reach your goals. But there will always be an element of risk.

Time can be your best friend when investing – many people hunt for that elusive edge that will help them reach their goals, the ‘holy grail’, but all you need is time. Time allows you to take on those riskier investments in the best ISA accounts in the hope for more significant returns, which means you can ride out any short-term fluctuations and be safe in the knowledge that you won’t have to pay capital gains tax.

Five factors to consider for an effective ISA account comparison

To help with the best ISA account comparison, here are the five things you should look for to find the best ISA for you.

1. Investment advice

Stocks and shares ISAs can be DIY vehicles, which means you’ll have to manage your investments yourself. You have the flexibility to choose what goes into your portfolio. However, you are responsible for planning your investment strategy, outlining your asset allocation, and researching the investments that best reflect you to go into your portfolio.

Many people like this freedom, but for those who are too busy to manage their investments by themselves or lack the financial confidence to oversee the family finances, the best investment ISA is on that offers professional investment advice that can help you to make better decisions with your money.

Making the right decisions for your financial situation means you’re more likely to reach your financial goals, whatever they may be, and could help you attain a better quality of life.

Innovation in the financial services sector means that people can now access investment advice on the best ISA options and other investment opportunities at the touch of a button and at a fraction of the price offered by traditional industry leaders. It can also be delivered anywhere and anytime, whether on your daily commute, over a glass of wine once the kids are in bed, or over brunch on the weekend.

Investment advice helps people invest in a way that’s right for them. Understanding your financial background, your appetite for risk, and your financial goals means you can build your investment portfolio in the best way to achieve these.

At Moneyfarm, our technology allows us to provide expert digital investment advice on the best ISA accounts for a fraction of the cost, with ongoing suitability tests that ensure your investments continue to put you in the best position to reach your goals for as long as you invest with us. That’s why we advocate that the best investment ISA is the one we at Moneyfarm offer.

2. ISA portfolios fully managed by specialists

Once you know what your stocks and shares ISA portfolio should look like in terms of asset allocation, how do you decide which investments to put in it?

Once you’ve got your portfolio set up, do you have the time and discipline to manage your portfolio to ensure you’re on the right track? You can invest up to £20,000 in your ISA each year (apart from the Junior and Lifetime types of ISA), so you’ll want to know you’re investing in the best ISA to reach your goals.

Many people love the thrill and responsibility of managing their investments themselves, but others just don’t have the time, skill, or knowledge to do their financial future justice. That’s why many prefer the experts to do it for them, so they can focus on the important things in life, knowing that a team of professionals with a track record of performance have their best ISA investments under control.

At Moneyfarm, the strategy for our best investment ISA is built around our strategic asset allocation team, which takes a 10-year view on market trends. While we can broadly forecast where we’re going to be in a decade, we know the route there might not be smooth, so we complement our strategic strategy with a tactical overlay to take advantage of any new opportunities that arise along the way.

3. Don’t let fees eat into your returns

Traditionally, having an expert manage your money for you has come at a high cost. The more you pay in fees, the more your investments have to grow, even in the best ISA to allow you to cover these costs and break even, and the more growth you’ll need to attain to make a profit.

It doesn’t help that pricing structures have also traditionally been convoluted, with many investors unaware of how much they’re actually paying in fees. All investors should be able to access cost-effective investment advice and discretionary fund management to help them reach their financial goals.

Thanks to changes in the regulatory landscape, wealth managers now have to adopt Moneyfarm’s philosophy of transparency and simplicity, although look out for exit fees as these still aren’t clear on some platforms. When you invest with Moneyfarm, you’re charged one flat fee across all of your investments with us, a percentage that reduces the more you invest or the more your savings grow.

4. Free transfers

Whether you’ve built up a small fortune in a cash ISA or have several different stocks and shares ISAs accumulated over the years, many investors like to transfer their various ISAs into the best type of ISA to benefit from cheaper fees and to manage their investments more efficiently.

When you want to move your money from one ISA provider – whether it be a bank, an asset manager or an investment platform – to another provider, it’s important you transfer your money correctly. You don’t want to take your money out of your ISA wrappers because you will lose the tax-free benefits you’ve accrued over the years unless you transfer it to another top ISA using the right transfer process.

ISA transfers have become hassle-free and straightforward for investors looking to make their money work harder for them. However, it’s important you understand whether you’ll be charged anything to move providers, as this could impact your decision.

Whether hidden or not, costs like transfer fees can eat into an investor’s return. At Moneyfarm, we believe investors should be able to transfer in and out for free – and you can. One of our founding philosophies was to be transparent over costs, which is why we don’t have any hidden charges.

5. Regular investing

When you’ve got a lump sum to invest, you’ll want to get it working harder for you as soon as possible, but it’s important you supplement this with a regular investment to your best ISA, or ISAs if you have several types of ISA.

In addition to increasing the amount you have invested in your ISA, it also averages out the amount you spend on investment over time, potentially lowering it during times of volatility. Little and often is a mantra that’s as effective as it is straightforward when it comes to investing.

That means you could end up paying less for an asset, which makes it that much easier to turn a profit.

Regular investment plans are a great way to benefit from pound cost averaging, but make sure you know how much setting up and running a standard investment plan will cost you. At Moneyfarm, it doesn’t cost a thing to deposit money in your account or set up a standing order.

This means you keep more of your money invested in the market, which can help you benefit from compound interest – where your earnings are reinvested to earn their own return. Albert Einstein called this the eighth wonder of the world, and it can make a real difference over the long run.

Which ISA to choose?

Which is the best ISA is subjective. At Moneyfarm, we’ve built our investment strategy around the stocks and shares ISA and we have recently begun to offer a cash ISA. Of all the types of ISA options, including the cash ISA, lifetime ISA and junior ISA, when it comes to asking, “Which ISA is best? – we suggest it’s the investment ISA for people who are not risk averse and a cash ISA for those who need a shorter term savings option.

The minimum age at which you can open a cash or a stocks-and-shares ISA is now the same. In most cases you must be 18 or over to open either type of adult ISA. The only exception is a transitional rule: anyone who was already 16 or 17 on 5 April 2024 may open (or keep contributing to) one cash ISA until they reach 18.

A short while ago, we performed a 10-year study comparing the performance of a hypothetical investment ISA vs that of a cash ISA. Against the backdrop of a low-interest environment, it’s clear to us that a well-diversified and actively managed stocks and shares ISA is the best ISA to use to help customers beat inflation and protect and grow their wealth for the long term.

You don’t need to be an expert to invest in stock markets and stocks and shares, and you certainly don’t need hundreds of thousands of pounds to do it. Digital technology has democratised the industry to such a degree that almost anyone can consider supplementing their futures with a well-thought-out investment plan. So, you’ll want to choose an ISA provider and a wealth manager that utilises technology to make the process as frictionless and transparent as possible.

Please refer to our comprehensive ISA guide to gain a more thorough understanding of different types of ISAs and how to invest in the best ISA account. For more information, please click here.

Here is our comprehensive guide for the full breakdown of the best investment ISA and how to invest in one. Furthermore, if you want to understand how our bet stocks and shares ISAs work, you can find more information here.

How to switch ISA provider

As we have discussed, people switch ISA providers for several reasons. Whether their current provider isn’t giving them the returns they need or they want to have all their investments in one, easy-to-manage place, choosing the best ISA for you may involve transferring—indeed, transferring an ISA is more common than you might think.

If you’re unsure whether it’s time to move your ISA, here’s a simple checklist.

• Is the return on your ISA lower than inflation? The purchasing power of your savings could be shrinking over time. Which ISA is best You might want to think about switching to our best investment ISA – our stocks and shares ISA
• Not finding the time to manage your money? You could be missing out on the important things in life because it’s taking you hours to manage your savings or investments. A provider like Moneyfarm does it all for you.
• Are fees eating into your returns? Your ISA could be costing you a small fortune, or you might not even be sure what you’re paying. Fees should be simple and low-cost.

You can transfer your new or existing ISA to Moneyfarm’s stocks and shares ISA or cash ISA for a tailored investment experience. We offer some of the best variable rate ISA accounts. Under the rules that took effect on 6 April 2024, you may now transfer all or part of the money you have subscribed in the current tax year, as well as any funds from previous years; you no longer have to move the full balance unless you choose to. (Some providers still set their own limits, so always check their transfer policy.) Any amount already paid in this tax year continues to count toward your overall £20,000 annual ISA allowance.

It can take up to 30 days to transfer your stocks and shares ISA from your existing provider to Moneyfarm. We won’t charge you anything to transfer to or from Moneyfarm, but your current provider might.

To initiate a transfer with any of the different types of ISA accounts into the best ISA for you, all you have to do is get in touch with a member of our investment advisory team. They’ll be happy to guide you through the entire process from start to finish, and they’ll take care of the admin for you. Get peace of mind that your ISA is in the right hands when you switch to Moneyfarm. The ISA types we offer are all protected by the Financial Services Compensation Scheme (FSCS).

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