ISAs, LISAs and JISAs – Saving for the future

Saving for the future is a crucial part of financial planning. It is basically the whole point of why we do it. Whether it is saving for your first home, to top up your pension, or perhaps to leave something for your children and grandchildren – having financial goals in place for the future is the reason we pay attention to our money.

 

There are many different options when it comes to the best choices for saving for the future. And, unfortunately, we simply cannot predict which one will work best for you just from this article. The best options for each individual depends on their own financial goals and their current financial situation. What we can do, though, is provide you with a guide to one specific product that is frequently used for saving for the future – the ISA.

 

There are many different products and types of ISAs out there. Here is our guide to each one, and when they may be most useful to help you save for your future.

 

Stocks and shares ISAs vs Cash ISAs

 

One crucial thing to think about before we start on the specific types of ISAs is that each type is offered in both stocks & shares and cash versions. Both versions are relatively simple to understand: cash ISAs hang on to your money as cash. Stocks & shares ISAs invest your money into the stock market. These 2 different products have varying rules for accessing your cash and for interest, however, this can differ between products and banks.

 

We spoke of the differences between cash and stocks & shares ISAs before, but as a rule of thumb, cash ISAs are perfect if you want a short-term savings product where you may need access to the money. Stocks & shares ISAs tend to perform better over the long-term, however you are at the mercy of more risk as you can lose money if the value of the stocks & shares in your ISA go down. We cannot offer guidance on the best specific products for you, so it’s worth researching yourself or speak to a financial advisor.

 

For savings in general, the tax benefits of ISAs make them definitely worth investigating further. However, there are restrictions to the amount you can open and save into each year – 1x stocks & shares and1x cash. When considering saving for future generations, we would recommend looking at Lifetime ISAs or Junior ISAs. The government bonuses for these make them much better than regular ISAs if you are going to be saving for the long term.

 

Saving for your first home, or a pension top up: the Lifetime ISA (LISA)

 

This type of ISA is a must-have product for those looking to save for their first home, certainly since the Help to Buy ISA was discontinued, or save for retirement.

 

The real benefit of LISAs is that they have a 25% government bonus – but only if you use them correctly within the restrictions. You will get a bonus worth up to £1k per year, but only if you withdraw the money either to buy your first home or when you hit 60 years of age. If you take out cash for any other reason, you will be charged a withdrawal fee. The fee is currently charged at 25% (as of 6th April 2021) – so you will actually lose more than you paid in, if you do decide to withdraw.

 

This makes LISAs a fantastic way to save for the future, as you are locked in to utilising them in the right way. If your children are saving for their first home, you can support them by adding to their LISA as a fantastic option. If you are looking to save for your retirement, you should first look into whether you can pay more into your pension, however a LISA is a greatchoice to further bolster your pension savings.

 

Junior ISA (JISA)

 

A Junior ISA is a very good, tax-efficient way to save for your children. You can save up to £9ka year tax-free for each child. This money belongs to your children, and they can access it when they turn 16, but they can not withdraw from it until they reach 18. If you intend to build up a lot of savings for your kids, this is a great way to do so.

 

If you plan to save for your children directly, another good option here is to utilise Child Savings Accounts – butbe very cautious about interest rates and tax with these products. If the money is gifted directly to children by their parents (and not grandparents or other relatives), there is a £100 limit on any interest earnt before the kids have to pay tax on their savings. These savings accounts are a good idea for children to pay smaller amounts of money into themselves and encourage them to save, but in the long term, for large savings, they not considered a good idea in terms of tax efficiency.

Md Mahamudul Hasan

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