An Individual Savings Account (ISA) is a savings account. With ISA, you never have to pay tax on savings. There is a limit on the amount that you can invest or save in an ISA each year, called annual ISA allowance. The allowance for the year 2020 is £20,000. An ISA is like a protective box. The things that you put inside it are safe from tax. Moreover, there are two basic types of Individual Savings Account: Cash ISA and stocks and shares ISA. However, a new and third option that has become relatively popular recently is Innovative finance ISA.

Types of ISA

Cash ISA

Cash ISAs are similar to a savings account. You save cash and earn tax-free interest.

Stocks and Shares ISA

With stocks & share instead of saving you invest your money in stocks and shares, commercial properties, bonds to grow your savings over time. The interest earned on these ISAs is also tax-free. Stocks & Shares ISA have more potential to grow quickly. However, since they as based on the stock market, there is a risk that your invested funds can go down as fast as they go up.

Innovative Finance ISA

IFISA allows you to invest money in a tax-free wrapper, meaning any interest you earn will never be taxed. This type of ISA is provided by peer to peer lending This type of investment and savings offers a higher interest rate however includes risk as well.

Different Sizes and Shapes of ISAs

Other than the two basic types of ISA, there are other types of ISAs as well, including:

• Help to Buy ISA: with this ISA you can save for your first home
• Lifetime ISA: with this ISA you can save for your retirement or home
• Junior ISA: with this, you can save for your children

How ISAs Work

If you are a UK resident and are 16 years old, then you can save a specific amount of cash in an ISA each year. This is your ISA allowance, and it changes every year. For instance, in the tax year 2017/18, the allowance was increased from £15,240 to £20,000. When you save your money in an ISA, it is never taxed, regardless of how long you keep it invested. With every new tax year, you have a new ISA allowance. This happens on the first day of the new tax year. However, if you do not use your annual ISA allowance entirely before the end of the year, it will be gone. Your unused ISA allowance doesn't get forward to the next year.

Benefits of ISAs

• The annual allowance for 2020 is £20,000
• Annual allowance will start fresh every tax year
• Grow your money tax-free
• Children of age 16 and 18 can hold both standard and Junior Cash ISA
• You can transfer your existing ISAs to your new ISA
• Specific ISAs are available to help you save for your first home or investment

What Happens to an ISA in Case of Death

When you die, your ISA loses the tax-free wrapper, and your estate becomes responsible for paying the tax on interest earned on your ISA account. Your spouse or partner can get your ISA to their name; this is called an additional permitted subscription. It is applicable to cash ISA and stocks & shares ISA both. For instance, if you have £30,000 in your ISA, then your spouse can inherit this sum and save it into a separate ISA account in their name, along with their £20,000 ISA annual allowance. Even if in your will you leave your ISA to someone else your spouse or partner can still gain profit from £20,000 additional annual ISA allowance.

Are ISAs Transferable?

You can transfer your ISA to a different service provider with a high-interest rate, the process is known as ISA transfer in. However, if you transfer ISA by taking out cash, cashing a cheque, or through a bank transfer, your funds will lose the ISA status. With ISA transfer in you don't lose your ISA allowance that you already have built up in the previous ISA. If you wish to move your ISA to another type of ISA with the same service provider, then you can do ISA consolidation, which allows you to combine different ISA types together into a new ISA.

Can All ISAs Be Transferred?

Not all ISAs can be transferred. Hence, you have to check with your ISA provider before applying, or you might end up with separate types of ISAs.

Can You Withdraw From an ISA and Pay Cash Back Later?

Whether your ISA has flexibility or not depends on the terms and conditions of your ISA.

If your ISA account is not flexible

• Any funds that you pay back to your ISA will count towards your remaining annual ISA allowance.
• If you exceed the allowance for that tax year, then the payment will be rejected.

However, your money loses its tax-free status if you withdraw cash and put it back into a regular savings account.

If your ISA account is flexible

• You can take out cash from ISA and put it back during the same year. It will not affect your ISA allowance.
• You can withdraw any ISA you have from your previous tax years, and you can put it back until the end of that tax year.

However, if you choose to transfer your ISA to another service provider before you pay back the money, then any deposit made will count towards your annual ISA allowance.

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