Individual Savings Accounts: how do they work

An Individual Savings Account, also known as ISA, is a scheme provided by the UK government which allow its citizens to save or invest cash, shares, and much more in a tax-efficient way. ISAs come in many different forms, as a matter of fact, there also is a special account designed for underage children and another one addressed for citizens aged between 18 and 40. Choosing the most appropriate proposal is entirely a personal matter, which depends on the age of the individual the investment account and on his or her personal needs and plans. Understanding what an Individual Savings Account is about allows one to have a clearer overview of the proposals available.

Different types of ISAs

As mentioned above, there are different types of ISAs, and each one may be more or less suitable for a certain kind of individual. Two types of ISAs, namely the Junior ISA and the Lifetime ISA, are targeted to specific categories of individuals who age is, respectively, under 16 in the former case, and between 18 and 40 in the latter.
Then, there is the Cash ISA and the Stocks and Share ISA and the Innovative Finance ISA. These 3 types are all available for any UK resident taxpayer over the age of 18. They differ essentially in the use made of the capital, an issue that is also directly reflected in the name describing each ISA: Cash ISA, Stocks and Shares ISA, Innovative Finance ISA. But how to choose the best type of ISA to open? The choice must also be made by taking into account the fact that within each type there are different proposals, depending on the declarations of intent and the wealth management company that uses the capital raised. The conditions proposed by the government are therefore always the same, what changes is the type of investment that is made with the capital and, consequently, also the return proposed to current account holders.

Risk return ratio

Anyone who has ever been interested in any kind of investment or speculation knows that the potential return is also directly related to the potential risk. The higher the economic proposition regarding the return of an ISA, the higher the risk threshold one must accept. The hypothetical risk is also influenced by the duration of an investment, but in the case of ISAs we are talking about speculations designed to last for decades: those who start an ISA account usually want to have a sort of supplementary pension available once they have reached seniority. A separate discourse must obviously be made for those accounts designed for underage children, namely, Junior ISAs. When deciding to open an ISA, it is therefore important to inquire about the proposed return, which in some cases may be guaranteed, as is the case with some types of Cash ISA. It is then up to the individual investor to reason about what risk threshold he or she is ready to face, also assessing the economic situation of the moment or getting some advice from an expert advisor in the field.

Junior ISAs

A Junior ISA, also called JISA, is a savings account designed for children under the age of 16. When it comes to this type of account, it is the parents or legal guardians who can open the plan for the child, on his or her behalf. The latter may only have the accumulated sum at his or her disposal once he or she has reached the age of 18. The maximum sum that can be saved or invested into a JISA is £9,000 per year. Another proposal for young people, aged between 18 and 40, is the LISA, Lifetime ISA, which allows one to save a small sum of money periodically, up to a maximum of £4,000 each year. Also in this case, as with JISAs and classic ISAs, there is a complete tax deduction of the sum deposited. However, the government also allows, under specific conditions, a refund of 25 per cent of what is paid into a LISA. The accumulated capital can be used for the purchase of a first house or for retirement.