The Break Down: ISAs
Around 81% of students have some level of savings during their time at university. Savings can be spread across basic savings accounts with banks, investments and ISAs. Each have their own benefits, but in this week's article we'll talk about ISAs - what they are, how they can benefit you and where to set them up.
What is an ISA and how does it work for students?
ISA stands for individual savings account and works much like any other savings account except that ISAs offer tax-free interest payments. This means that regardless of how much interest the bank pays you for keeping your money in their accounts, you don't have to pay anything from it to the government. There are limits on how much money you can put into ISAs - currently at £20,000 annually, and normal savings accounts will also give you tax free interest up to £1,000.
However, in the long term, and for high earners, ISAs can be a great way to save money for the future. They're a good idea for students because of this, but also because your student loan repayments are based on taxable earnings, and because ISAs interest is tax free, student loan companies cannot see it as income. This can be especially helpful if you've decided to invest large amounts through an ISA or want interest on savings without the issues of higher loan repayments. All earnings from ISAs, regardless of how high, won't increase your loan repayments.
What types of ISAs are there?
There are 4 types of ISAs currently available to new customers in the UK:
stocks and shares ISAs
innovative finance ISAs
Cash ISAs are the most basic type of savings ISA - you put in money that you want to save and if you have a flexible account, you can take out money whenever you want, and if you have a fixed term ISA then it is released back to you at a certain date. You can often open these accounts with as little as £1.
Stocks and shares ISAs are a great way to invest money in the markets while (because your money is going through an ISA) not being taxed on any income you make from it. These can be longer term investments and usually require certain amounts of cash to be put in monthly or a larger lump sum. It's also worth remembering that because your money is invested in the stock market, you could make loses meaning you end up with less than you started. Holding onto the account for longer helps lessen this risk, in hopes your shares go back up, and even with this possibility, these ISAs are potentially a nice way of making a passive income.
Innovative finance ISAs or IFISAs are also investment ISAs. Known as P2Ps, you lend your money directly to a borrower or business. They then pay back you back the borrowed amount, with interest on top. There are risks, as acting as a creditor means that people could default on their loan and you could end up losing money. Again, it's a riskier option, but you can create a level of safety net by using a trusted bank to take out the ISA and choosing one that has guarantees about making your money back.
Lifetime ISAs are a great way of saving for a house deposit or retirement fund - they give you a 25% bonus on what you add in annually up to £1,000. There are rules about withdrawals, allowing you to spend the money if you're putting a deposit down on a house or once you're 60. Otherwise, charges can be incurred for early withdrawals. They can exist as cash or stock and share ISAs, but can generally represent a great way of building long term security. If you opened an account on your 18th birthday and put the maximum £4,000 a year in then by the time you retired you'd have £33,000 free from the government.
How do I get an ISA?
Requirements for ISAs will change depending on which type you decide is right for your needs, but generally, you need to be 18 (or 16 for a cash ISA) and be a resident in the UK with most requiring your national insurance number on application. Most nationally known banks offer cash ISAs and stock and shares ISAs but it's often worth reaching further afield to find better deals. Looking for high interest rates and terms that suit you (such as being flexible or having requirements for withdrawal) is a good way of deciding what's right for you, and it's worth evaluating the risks you want to take on if you choose a stock and shares ISA.