As we get older, we start to think about our future plans, especially concerning financial decisions about retirement, or when we want to make a life-changing purchase, such as a house. It may be time for your clients to start thinking about contributing to an Individual Savings Account to prepare for these life events.
There are four different types of ISA that you could recommend to clients:
A Cash ISA allows people to put up to £20,000 into an ISA account to earn tax-free interest. You can only open one Cash ISA a year; however, it’s possible to have a Lifetime ISA, Stocks and Shares ISA or an Innovative Finance ISA at the same time as a Cash ISA; all of them combined cannot go over the £20,000 allowance threshold. In addition, whilst only one Cash ISA is allowed per year, it can be transferred to another provider during the same tax year if you believe that will yield a better result.
There are many types of Cash ISAs, including Fixed-Rate and Easy Access. There are also Junior ISAs for children up to the age of 17 that only a parent or guardian can open (however, if the child is 16 or 17, they can open a Junior ISA account themselves). These accounts are allowed a yearly allowance of up to £9,000. However, an individual cannot have a Junior Cash ISA and a Child Trust simultaneously.
The Lifetime ISA is available for anyone over the age of 18, and they can pay into the account until the age of 50. The amount that can be paid in annually is £4000, and a 25% government bonus is received for each amount saved in a year. For example, if you put £4000 into the Lifetime ISA in one year, you will receive a bonus of £1000 from the government. There are restrictions with a Lifetime ISA and funds may only be removed if the account holder fulfils the below criteria or they will be liable for a 25% withdrawal charge:
- They are over 60
- They are terminally ill and have less than 12 months to live
- They are buying their first home 12 months after the account opening, using a conveyancer or solicitor, up to the value of £450,000
An Innovative ISA enables use of the tax-free ISA allowance to invest in peer-to-peer lending. The account holder, and possibly others, fund loans to borrowers. The borrowers could be individuals or businesses who then pay the money back over a period of time. Innovative ISAs seem lucrative due to higher interest rates; however, they have limited protection if the borrower defaults, and whilst there may be some contingency funds dependent on the provider, it could still be costly.
Stocks and Shares ISA
A Stocks and Shares ISA allows the client to use their tax-free allowance to make investments, including individual shares, bonds, and investment trusts. However, it is vital to remember that whilst investments can increase in value, they can also decrease if the market is volatile. Stocks and Shares ISAs are also available as Junior Stocks and Shares ISAs.
In the 2022/2023 year, it’s possible to save tax-free up to £20,000 combined from all ISAs. However, some may have weighty penalty charges if there are unauthorised withdrawals made, and others may not be flexible.
For example, if you have one cash ISA that has £10,000 and you withdraw £1000, this takes it to £9000. A flexible ISA would still let you put £11,000 in the account to equal the £20,000 allowance. On the other hand, other providers would see that £9,000 as still being £10,000 despite £1,000 being withdrawn; they would then only let you put a further £10,000 into the account. Furthermore, you cannot carry your yearly annual allowance over, so you will lose it if you do not use it; the ISAs cannot have joint names, and the accounts can still fall victim to inheritance tax.
We are currently in a climate of increased taxation, and we want to help you support your clients with a financial plan that focuses on wealth and assets, ensuring that they are protected and grow to their best potential. Contact Private Client on 01926 514 390 to find out more.