How to pick the right Isa

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A time to shine

How to pick the right Isa

Mini, maxi, Pep, Tessa, Tessa only Isa (Toisa), cash Isa, stocks and shares Isa, Innovative Finance Isa, New Isa (Nisa), Help to Buy ISA (Hisa), Lifetime Isa (Lisa), Junior Isa (Jisa). Is anyone else ready for Isa simplification? It is time we had an ‘I day’.

Introduced in April 1999 by Gordon Brown, Isas replaced the earlier Peps and Tessas to provide a tax-efficient way of saving each year. First came the mini and maxi, then the cash model and stocks and shares version. In July 2014, the restrictions between cash and stocks and shares Isas were relaxed with the introduction of the New Isa (Nisa). We all thought it was finally made simple and thankfully the term Nisa never caught on. 

But this was short lived when George Osborne released a plethora of new Isa products. Now you can use an Isa to buy your first home or save for retirement. But not if you are a certain age, need the money earlier, already own a home, or are caught by any of the numerous other restrictions. 

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Most people understand the concept of cash and stocks and shares Isas. Most of the queries we receive are regarding the Help to Buy Isa and Lifetime Isa.


Help to Buy Isa

On the face of it, Help to Buy Isas are a bit of a no-brainer if you are a first-time buyer. An individual is able to save on a regular basis and then apply for an additional 25 per cent bonus from the government. It is possible to save up to £1,200 in the first month and then up to £200 per month after that. You are able to save up to £12,000 each to get the maximum available bonus of £3,000. 

Assuming you contribute the maximum each month, in order to receive the maximum bonus available you will need to save for four years and seven months. Over that period, the average property price went up by nearly 30 per cent to £217,000 (Office for National Statistics). Some of that increase was due to a recovery following the 2009 crash, but even if house prices only went up by another 5 per cent, that is still an increase of £10,850. A bonus of £3,000 is not going to help much. 


Lifetime Isas

Like the Help to Buy Isas, Lifetime Isas should be of benefit to first-time buyers. They are able to save up to £4,000 per year with a government bonus of 25 per cent that has a maximum level of £32,000. The maximum property value has also increased to £450,000, compared with £250,000 (£450,000 in London) for the Help to Buy Isa. 

In order to receive the maximum bonus of £32,000, the individual will need to save for 32 years. This means opening the account at age 18 and saving the maximum £4,000 per year until age 50 when the bonus stops. There are not many people who will be able to do this. 

Lifetime Isas can be used as a retirement savings vehicle. This could have been great news for clients reaching their lifetime allowance or who are affected by the tapered annual allowance. But of course, you can only open this account between the ages of 18 and 40. Most people in this age bracket are considering further education, starting a career, moving up the property ladder or starting a family. Retirement is simply not on the agenda.