Investments and savings accounts in the UK: ISA, IFISA, LISA, H2B ISA

I am still debating whether I should write this as a post, or a page, since the content will very likely be relevant for a long time, and to a many of the readers.
The idea of writing this post came recently, as I was talking to a close friend about his income, and investments. I’ve asked him if he has any type of ISA account, and the response was brilliant: “A what account? Should I have one?”.

As this is a person with postgraduate education, earning over £100000 a year, this made me realize that people just don’t have this information available in a simple way, so choose to ignore it.
So, what accounts can an individual open in the United Kingdom?

Cash-based:

  • Current account – this is the equivalent of the US checking account. Usually comes with a debit card. Sometimes offers interest on balances.
  • Cash savings account – this is an account which typically doesn’t come with a debit card, but always pays interest. The highest interest in the UK is 5%, for some monthly-savers accounts
  • Cash ISA – this is an cash savings account which pays interest, but unlike the previous item, the interest is tax free. The contribution across all ISA accounts, in a tax year, is limited (currently to £20000)
  • Help to buy ISA (or H2B ISA): this is a cash savings account which pays interest, and upon withdrawal for the purpose of purchasing your first property, the government adds 25% of the account balance, as a bonus. Tax free. The contributions are limited to £200/month.
  • Cash Lifetime ISA (or Cash LISA): a Lifetime ISA account is meant to replace the H2B ISA account, and provides a similar offering: Pay up to £4000 every year, and the government adds 25% of what was paid that year, to your account balance. Can be withdrawn for your first property, or upon retirement.
    Only one UK institution offers a cash LISA.
  • Cash Junior ISA: Helps parents save up to £4080 in the name of a child. Can be held until 18 years old.

Securities – based:

  • Standard investment account: Allows access to financial markets. Can trade a wide variety of assets. Income is taxed. Usually meant for long term investments.
  • Stocks & Shares ISA: Allows access to financial markets, for a more limited array of assets. The contribution across all ISA acccounts, in a tax year, is limited (currently to £20000). Capital growth, and dividends, are tax free.
  • Lifetime ISA: Allows access to financial markets, for a more limited array of assets. Similar to the Cash LISA, but holds stocks/funds/ETF investments. The offering is the same: Pay up to £4000 every year, and the government adds 25% of what was paid that year, to your account balance. Can be withdrawn for your first property, or upon retirement.
  • Junior ISA: Helps parents save up to £4080 in the name of a child. Can be held until 18 years old.

Alternatives:

  • Innovative Finance ISA (or IFISA): Allows tax-free investments in various platform and vehicles. Typically, the types of investments fall under the following categories: property crowdfunding, mortgage crowdfunding, peer to peer loans, business loans, or royalties. More of this, in a following post. The contribution across all ISA accounts, in a tax year, is limited (currently to £20000).
  • Inheritance ISA: This is not a product on its own, but rather an HMRC policy, allowing a surviving spouse inherit the deceased partner’s ISA account, and allowance, tax free, while not affecting their own ISA allowance.
  • CFD trading / Spread betting account: Allows access to financial markets, but to bet on market movements, instead of purchasing of assets. Not available as an ISA, however spread-betting in the UK is exempt from stamp duty and capital gains tax.

Was that too much? Well, a summary:

I am working on a series of posts which will dive deeper into the details behind the different types of accounts, together with my experience with some of these accounts. Bear in mind that I will be talking from my own experience, and not provide financial advice – you should always do your own research before making financial decisions!