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 Can be withdrawn for your first property, or upon retirement.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!

Avoid mistakes when saving & investing

This post will tie very well with a previous one, where I was analyzing a list of failures; and will almost create a mini-series together with the next one, where I will discuss in detail various investment accounts and vehicles available to UK residents/citizens. Below, I will discuss a series of investment-focused mistakes that I’ve made over the years – hoping that you, as a reader, won’t make the same mistake again!

When did I start investing?

To be specific: 2016, July.
Prior to that point, my employer did not allow any investment accounts, to prevent insider trading. As soon as I switched jobs, I’ve opened a Stocks & Shares ISA account.

When did I realize I am doing it wrong?

Roughly when I started following the FIRE community, and reading some blogs on a regular basis. There was something obviously wrong: People had written plans. People had a structure in their investments. People had an asset allocation. I did not have any of those.

What did I do wrong?

Well, a few things:

Asset allocation. Or lack thereof…

No, this is not me

I guess the most obvious mistake was the lack of an asset allocation plan. As Sam from Financial Samurai wrote very well in the beginning of his post, “There is no correct asset allocation by age” – but having one is better than having none. My regular savings were:

  • £200 every month into a cash ISA account, at 4% a year
  • £250 every month into a S&S ISA account, which added £50 into each of 5 funds.

Suggestion: Have an asset allocation plan. If you don’t know what that is, google it – chances are, following the first result will be better than having nothing.

Picking investments because they sound OK

So, almost half of my assets were in cash, and the other half in 5 funds. And speaking of funds…

Suggestion: Based on your asset allocation plan, look up funds or ETFs that match your requirements. Do not trust any friend, any single blog, or your banker. Oh, and don’t trust me either! Do your own research, and you will always be better off.

Sitting on cash at a low interest rate

Whoever said that people should not listen to their banks, was right. My bank suggested that I open a Cash ISA account, “because it’s tax-free”. Trouble is, there isn’t much interest to tax anyway, as they have initially offered 1.5%/yr. I then transferred it to a 4% account, which dropped to 3.5% after 12 months.

Now I am stuck with this account until it pays the interest (March 2018), then will transfer it into the S&S ISA.

Suggestion: Only have cash savings if you have variable income and have to even out low times.

Investing in P2P at a low interest rate

I became a fan of Peer to Peer lending during the job that did now allow me to invest in any securities – as it was my only option. I have signed up for an account with RateSetter, which promised “up to 6%”. And I have to give them credit – they delivered. My portfolio averaged 6.2% at times.

One long-term advantage of having the money in this account is accessibility – loans can be sold and money withdrawn in 24 hours. Another advantage is that RateSetter (as other providers) has a guarantee that in case a borrower defaults, you’ll get your capital back.

I am still a fan of P2P loans – but now I see this investment in a different (higher) risk profile. Just think about what most of these loans are for: cell phones, new sofa, or that summer holiday to Ibiza. Tough times come, these will be the first type of loans which someone will default on – not their house, not their cars. And the issue doesn’t show when one person default, but when 2008 happens and the lender goes bust. By treating P2P loans in this way, now I allocate less capital to it, and look for higher returns.

Suggestion: Treat P2P loans correctly – unsecured debt. Think that usually there is little more than a promise backing the loan – no house, no car, no company assets.

So, what’s the plan?

This is tough – as until about 1 hour ago, I did not have a written one. I’ve started making my plan by applying retroactive data on it:

  • I have way too much exposure to tech
  • I have way too much exposure to US stocks
  • Asian stocks go well, however I get nothing of that
  • P2P loans are OK, as long as I get compensated appropriately
  • The elephant in the room – crypto currencies. I still see it as speculation and not an investment, but I have and would like to keep the exposure.

After a bit of spreadsheet work, my chart looks like this:

I know this may look overly complicated, but bear in mind that 99% of asset allocations do not include cryptocurrencies, property, private equity, or Peer to Peer loans.

Hope this post helps. How does your allocation chart look like?