Are ISAs a safe way to protect your money?

One question every ISA saver wants the answer to is, ‘are ISAs safe?’ In this article we’ll answer just that: Are ISAs a safe way to protect your money?

So, join us as we pore over how ISAs (Individual Savings Accounts) work, explore their safety, and the benefits they offer for your savings.

What is an ISA and how does it work?

An ISA, or Individual Savings Account was introduced 25 years ago to help savers grow their funds without paying tax or capital gains on the interest earned.  As the product grew in popularity, so did the various types of ISAs  available. There are now several variations of ISAs, all with their own savings goal, from retirement planning to house deposits and more in between. The most popular ISAs available include Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs and Lifetime ISAs.

 Are ISAs a good way to invest?

ISAs provide a tax-free wrapper around your savings or investments. Any interest, dividends, or capital gains generated within an ISA are shielded from tax, they’re an attractive offering for savers looking to grow their wealth.

How safe is your money in an ISA?

ISAs are also protected by The Financial Services Compensation Scheme (FSCS). This scheme protects your money up to value of £85,000 per person, per financial institution. This means if your bank or building society fails, your savings up to this limit are secure. For joint accounts, the protection doubles to £170,000.

As this limit applies per institution, not per account, it could be a good idea to look into spending your savings across different financial institutions if you have substantial funds. If you’re considering this, we’d always recommend you speak to a financial adviser for professional advice.

Tax benefits of an ISA

One of the main draws of ISAs is the tax benefits they offer. Any interest earned on Cash ISAs or returns on investments within a Stocks and Shares ISA remain tax-free.

What is the annual ISA allowance?

Each year, the Government puts a tax on the amount of tax-free savings you can put in your ISA in a given tax year (6^th April to 5^th April).

You can also spread the £20,000 ISA allowance over a number of different types of ISAs. For example, you could put £7,000 in a Cash ISA, £7,000 in Stocks and Shares ISA and up to £4,000 in a Lifetime ISA.

Cash ISAs, Stocks and Shares ISAs and Innovative Finance ISA (IfISA)

For the 2023/2024 tax year, the annual ISA allowance on a Cash ISA, Stocks and Shares ISAs and Innovative Finance ISA is £20,000, providing generous room for tax-efficient savings and investments.

This ISA allowance resets each tax year, so if you have £20,000 invested in a Cash ISA in year 1, you can invest up to £20,000 again in year 2, and year 3 and so on.

Discover the top benefits of Cash ISAs here.

Lifetime ISAs

A Lifetime ISA (LISA) can be opened by any UK resident aged between 18 and 39. The annual Lifetime ISA allowance has a lower cap of £4,000 but offers a 25% bonus on savings used for retirement or buying your first home – that could translate to a £1,000 bonus if you deposit £4,000.

Junior ISAs

There are also Junior ISAs (JISA) available for children under 18 and living in the UK. These accounts can be opened and managed by the child’s parent or guardian, but as the money belongs to the child, the money invested is not counted as part of the adult’s annual ISA allowance. There are two types of Junior ISA, Cash Junior ISA and Stocks and Shares Junior ISA. They also have their own annual ISA allowance cap– you can find out more about JISAs on the HRMC website.

What type of ISA should I get?

Choosing the right ISA depends on your financial goals. Think about the moments you're saving towards and how you plan to get there.

Some things to consider:

• Are you looking for a lower risk savings accounts with a fixed interest rate? A Cash ISA could be ideal
• Are you willing to take on a little risk with your investment for a potentially higher interest rate and return on your investment? Look into a Stocks and Shares ISA
• Are you working towards a bigger, long-term goal such as retirement or a house deposit? A Lifetime ISA could be a great option.

Whether you're looking for secure savings or are open to investing for potentially higher returns, there’s an ISA to suit your needs. By understanding your own motivations to save and how ISAs work, you can find a secure and tax-efficient way to protect and grow your money.  Read our blog on ‘what type of savings account do I need’ if you need more help finding the best fit for you and your money.

Want more? Find out how Hodge can help save and about Hodge ISA products.

Remember, when considering ISAs, it’s best to consult with a financial advisor to tailor your approach to your individual circumstances.

This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at unbiased.co.uk.