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ISAs explained

What is a ISA?

‘ISA’ stands for Individual Savings Account, and it’s a tax-efficient way to invest your money. While you’d pay tax on interest from a savings account, an ISA lets you keep all the gains. As a result, your investment pot could have a better chance to grow.

What types of ISAs are there?

There are six types, designed to suit different financial needs and goals. These are:


Stocks and Shares ISA -
invests in funds, unit trusts, bonds and shares in companies. You can decide the exact make-up of your ISA, and change it whenever you like. If you’re willing to take some risk with your money, Stocks and Shares ISAs have the potential to offer higher returns than Cash ISAs.

Cash ISA -
works much like an ordinary savings account, except you don’t pay tax on the interest. Some Cash ISAs offer instant access or fixed-rate deals.

Junior ISA -
a tax-efficient way to invest for a child under 18. You can choose either a Cash Junior ISA or a Stocks and Shares Junior ISA. The money grows tax-free and only your child can withdraw it – when they reach the age of 18.

Lifetime ISA (LISA) -
designed to help you save towards either your first home purchase or your retirement. A Lifetime ISA can include either cash or stocks and shares. To open one, you must be between the ages of 18 and 39. You can pay in up to £4,000 in one tax year, and this counts as part of your ISA allowance of £20,000. The government adds a 25% bonus to your savings, up to a limit of £1,000 a year. You can withdraw your money to pay for some or all of your first home, or when you reach age 55. If you take your money before that date, you may have to pay a 25% tax charge.

Innovative Finance ISA (IFISA) -
this is made up of peer-to-peer loans or crowd-funding debentures. It lends your money to people or businesses in return for a set amount of interest.

Help to Buy ISA -
designed to help you save towards your first home. The government will add a 25% bonus to your savings, up to £950 in the first year, and £600 in following years. To open one you must be 18 or over. You can withdraw your savings to pay for some or all or your first home. If you withdraw your money before that time, you may have to pay a 25% tax charge.

How much can I pay into ISAs?
Currently, each tax year you can pay up to £20,000 into ISAs. That’s the ISA allowance set by Her Majesty's Revenue & Customs (HMRC). You can pay it all into one ISA or divide it among different ISAs (but you can only pay £4,000 into a Lifetime ISA in one tax year).
Who can open an ISA?
To open an ISA you must be:

• Resident in the UK. Or, if you don’t live in the UK, you must be a Crown servant (for example diplomatic or overseas civil service) or their spouse or civil partner
• Age 16 or over for a Cash ISA or Help to Buy ISA
• Age 18 or over for a Stocks and Shares, Junior or Innovative Finance ISA
• Age 18 or over, but under 40, for a Lifetime ISA

You can’t hold an ISA with, or on behalf of another adult. But you can open a Junior ISA (JISA) for a child under 18.
What makes an ISA tax-efficient?
As long as the investments are kept within an ISA, you don’t have to pay income tax or capital gains tax on the growth of those investments. Any dividends received in the ISA wont impact your personal dividend allowance.
When can I take my money out?
Most investors agree it’s best to think long-term and invest for at least five years – to give your money a better chance to grow. But if you want to make a withdrawal, or close your account altogether, you can do so whenever you like, without losing any tax benefits. There’s usually no charge for doing this.
If it’s a Flexible ISA, like ours, you can take money out, then put it back later in the same tax year without reducing your current year’s allowance.

Here’s an example:
Your ISA allowance is £20,000. You put £10,000 into an ISA during the 2018 to 2019 tax year. You then take out £2,000. The amount you can now put back in during the same tax year is £12,000 (your remaining allowance of £10,000 plus the £2,000 you took out).
Can I open more than one ISA?
In any one tax year you can open one each of:

• Cash ISA
• Stocks and Shares ISA
• Junior ISA
• Innovative Finance ISA

Plus one of either:
• Help to Buy ISA
• Lifetime ISA
Is there a minimum amount I need to open an ISA with?
There’s no legal lower limit, but different ISA providers ask for different minimum amounts. The minimum amount to open a VitalityInvest ISA is £100 per month, or a single payment of £1,500.
Can I change the funds in my ISA?
Yes, you can do this any time you like. Just contact your ISA provider and choose which funds you want to change.
Can I transfer my ISA to another provider?
Yes, you can do this at any time. You can transfer your money to a different type of ISA or to the same type. If you want to transfer money you’ve invested in an ISA in the current year, you must transfer all of it. If you’ve invested money in previous years, you can transfer all or part of it.

Depending on what type of ISA you have, there are some further rules:
• If you transfer cash or assets from a Lifetime ISA to a different type of ISA before you reach the age of 60, you’ll have to pay a withdrawal fee of 25%
• You can transfer cash from your Innovative Finance ISA to another provider, but you may not be able to transfer other investments from it

The time it takes to transfer an ISA depends on the provider it’s being transferred from, however should typically take:
• 15 working days for a Cash ISA or a Cash Lifetime ISA
• 30 working days for a Stocks and Shares ISA, investments held in an Innovative Finance ISA, and Stocks and Shares in a Lifetime ISA
Can I set up an ISA for my child?
Yes, you can. It’s called a Junior ISA (JISA), and you can open one as long as:

• You’re the child’s parent or legal guardian
• The child is under 18
• The child doesn’t have a Child Trust Fund (if they do have a CTF, you can open a Junior ISA provided that you transfer the full CTF)
• Your child is a resident of the UK

Currently, you can pay up to £4,368 into a Junior ISA each tax year, and the child can only access the money when they turn 18.

Find out more about Junior ISAs.

Please note, to open a VitalityInvest Junior ISA, you must be resident in the UK. Or, if you don’t live in the UK, you must be a Crown servant (for example diplomatic or overseas civil service) or their spouse or civil partner.
Can I inherit an ISA?
Yes, you can. Not only that, if your spouse or civil partner dies, you can inherit their ISA allowance. As well as your own ISA allowance you can add a tax-free amount of up to either:
• the value your partner held in their ISA when they died, or
• the value of their ISA when it closed
Do I need to declare ISAs in my tax return?
Whilst your ISA remains invested, there is no tax to pay so HMRC doesn’t require you to give them any information about it.
I have some shares. Can I transfer them into an ISA?
Only if they were issued to you as part of an employee share scheme.
What happens to my ISA if I move abroad?
You won’t be able to put money into the ISA after the tax year in which you move (unless you’re a Crown employee working overseas or their spouse or civil partner). But you can keep your ISA open and you’ll still get UK tax relief on it. You must tell your ISA provider as soon as you stop being a UK resident. If you return and become a UK resident again, you can start paying into your ISA again.
What if I accidentally pay too much into my ISA?
Don’t worry, HMRC will notice this has happened and contact you. The ISA provider will then return the excess amount to you. But if you spot the error first, you can contact HMRC and let them know.
What’s meant by ‘flexible ISA’?
A flexible ISA allows you to stop, start, increase or decrease contributions, and withdraw money, whenever you like. It also means you can take money out, then put it back later in the same tax year - without charge, and without reducing your current year’s ISA allowance.
Why might a Stocks and Shares ISA be better than a Cash ISA?
Stocks and Shares ISAs invest your money in funds, unit trusts, bonds and shares in companies. So, if you’re willing to take some risk with your money, and invest over the long term, they have the potential to earn you higher returns than Cash ISAs.
If I die, what happens to my ISA?
Your ISA can be transferred to your spouse or civil partner, or anyone else you name in your will, if you’ve made one.

It’ll stay open until either your executor closes it or the administration of your estate is completed. If neither of these things happens within three years and one day of your death, your ISA provider will close the ISA. There’ll be no income tax or capital gains tax to pay up to that date, but ISA investments will form part of your estate for the purposes of inheritance tax.

For the exact details it’s best to check the terms and conditions of your ISA for details.
What’s meant by ‘tax year’?
Also known as the financial year, it runs from 6 April to 5 April. At the end of the tax year, your ISA allowance is renewed. You cannot carry over any unused ISA allowance from one tax year to the next. Any money you put in during the previous tax year will continue to be invested free of tax.

ISAs at a glance

• Returns are tax-free
• Invest up to £20,000 a year (£4,368 for a Junior ISA)
• Transfer money between ISAs
• Take money out at any time
Explore VitalityInvest ISA

Please note, any tax benefits you receive depend on your tax position as well as current tax law - both of which may change in the future.