Saving money isn't all about budgeting and cost-cutting. A smart saver will invest their personal finance in the way that generates the most interest or bonus pay-outs. After the recent chancellor's Budget announcement, ISAs have been seen a lot in the news, so here is an explanation of the new ISAs and what they are all about.
What is an ISA?
ISA stands for Individual Savings Account. It is what is known as a wrapper. If banks and building societies create a type of bank account that follows certain regulations, the Government will not charge tax on the interest up to a certain limit called a tax free allowance. There are ISAs designed for saving up cash, or investing in stocks and shares, each with their own allowance limits and rules. However, two new kinds have recently been introduced.
The Lifetime ISA is designed for either saving up to buy a home or for retirement. You can deposit either cash or stocks and shares.
The Lifetime ISA will be available from many major banks and building societies from April 2017 for those between 18 and 40. If you deposit the maximum amount of £4000 within the tax year, another £1000 will be added by the state. While it's yet to be decided whether you can deposit more than £4000 within a year, you need at least this much to get the £1000 bonus. You can continue receiving the bonus each year you contribute the required £4000 until you are 50 years old. You will also receive tax free interest on the account, or tax free growth if you invest it in stocks and shares.
You can withdraw the money when you turn 60 or when you are buying a home so long as you have had the account over a year. The home must be in the UK and worth £450,000 or less. If you withdraw the money before then you will not receive the bonus amount and you will be charged a 5% fee on the amount you withdraw. If you only withdraw some of the account, you can still receive perks on the remaining amount.
If you are buying your home with a partner you can both take advantage of the ISA bonus as long as you are both first time buyers.
If you are saving for retirement the ISA can be used alongside your pension. The main difference is in claiming benefits or declaring bankruptcy. An ISA counts as personal savings which can affect this but a pension does not. Between the ages of 50 and 60 you won't receive any bonuses on your savings but can still receive tax free interest or growth.
Help to Buy ISAs
Last year's budget introduced the Help to Buy ISA. ISAs of this type are available as of April 2016. With this ISA you will receive 25% on top of whatever you pay in up to £200 per month but the bonus only activates if you use the money to purchase your first property.
You can only have one Help to Buy ISA account, but if you are buying with a partner you can have one each. The home you buy can't be worth more than £250,000 unless you are in London, in which case it can be up to £450,000.
For more about Help to Buy ISAs and last year's budget announcement, you can read the Money Dashboard blog post published at the time.
Other than the introduction of the Lifetime ISA the biggest change announced in the latest Budget is an increase on the total value you are allowed to invest in ISAs each year. In April 2017 the total allowance will increase from £15,240 to £20,000. You can pay into and receive bonuses on a Lifetime and Help to Buy ISA along with other types of ISA and as long as your total investment is less than £20,000 in a year, the interest will remain tax free.
Using Money Dashboard as your own budget planner, you can track your progress as you save towards your financial goals, including cash you save into an ISA.