What is an ISA?

What is an ISA?

A guide to understanding ISAs

An ISA is an Individual Savings Account. It's tax-efficient, allowing you to make the most of your savings & investments.

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What is an ISA?

ISA stands for Individual Savings Account. It is where each UK resident can save or invest tax-free, either in cash, stocks & shares or peer to peer lending. Tax is not charged on any interest or gains made within an account. The ISA was originally introduced in April 1999 to replace the old Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).

Understanding ISAs

There are three types of ISAs for adults; a Stocks & Shares ISA (which we refer to as an Investment ISA), a Cash ISA and an Innovative Finance ISA (the last two are not offered by Scottish Friendly). You can have one of each type of account providing you stay within your annual ISA allowance – currently £15,240.

Children can also have two Junior ISAs each; a Stocks & Shares Junior ISA and a Cash Junior ISA (not offered by Scottish Friendly).

Tax-free in terms of a Cash ISA or Innovative Finance ISA means you don’t pay tax on any interest earned on your savings or lending. In relation to a Stocks & Shares ISA it means the fund your plan invests in grows free of income and capital gains tax (other than tax on dividends from UK shares). Tax treatment depends on your individual circumstances and tax law may change in the future.

What is a Stocks & Shares ISA?

A Stocks and Shares ISA is what we call an Investment ISA because it can invest in much more than the name suggests.

This type of account usually aims to put your money to work using the long-term growth potential of the stock market. It can also offer access to investment in property, bonds and cash. If the market performs well, your investment could grow. However, the value of your investment can go down as well as up, so you could end up with less than you paid in.

Investment ISAs are normally considered medium to long-term investments, of at least 5 years but ideally 10, to give your money access to the growth potential of the stock market.

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What is a Cash ISA?

A Cash ISA works like a regular savings account, with the difference being any interest you earn on your savings is tax-free.

Traditionally Cash ISAs have offered people a secure place to keep their money, offering a steady yet modest growth. Money saved in a Cash ISA cannot decrease in value, meaning your capital is guaranteed, so you will get back at least as much as you pay in.

However, in times of low interest rates, the return you get on your Cash ISA may not outpace the rate of inflation, meaning your money may not be worth as much in the future.

Depending on which Cash ISA you choose, you may also be able to get hold of your money quickly, if need be.

Remember - Scottish Friendly don't offer Cash ISAs

What is an Innovative Finance ISA?

An Innovative Finance ISA allows you to lend to others through a peer to peer (P2P) loan without paying tax on the interest you earn.

Peer to peer lending has traditionally offered higher interest rates than secure cash accounts by cutting out the banking middleman. Those you lend to will pay your money back, through time, with added interest.

However, if your borrowers aren’t able to pay you back, you could lose your money. And unlike other ISAs, that money will not be protected by the Financial Services Compensation Scheme (FSCS).

Remember - Scottish Friendly don't offer Innovative Finance ISAs

An ISA for children

There is also a version for children called a Junior ISA. A Junior ISA also comes in the form of both cash and stocks & shares.

Scottish friendly currently only offer a Stocks & Shares Junior ISA which lets you start from as little as £10 a month, £50 lump sums or a combination of both.

Of course, like any stock market investment the value can go down as well as up and your child could get back less than what has been paid in.

Find out more about Junior ISAs by visiting our 'What is a Junior ISA?' page.

Scottish Friendly ISA

At Scottish Friendly we only offer Investment ISAs, enabling you to invest for the future.

Our Investment ISA has a special feature; you can split your ISA into separate policies, allowing you to set aside different sums of money for different events in the future or family members. This means that over time that you could set up a policy for each of your children, another for a rainy day fund and maybe another for that special family holiday (provided of course you remain within your annual ISA allowance).

You can stop, restart, raise or lower your payments whenever you like. So if you need to take a break in your payments or put in a little more when times are good that's no problem.

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Yearly payment increases

You might want to put a little extra away each year if, for example, you get a salary increase each year. With a Scottish Friendly ISA you can choose to increase your payments each year by a rate to suit you - for example 2.5%, 5% or 10%.

The tool below lets you see the effect of increasing your monthly premium each year over a 10 year period. Remember your monthly premium will continue to increase past year 10, however you have the option to change the yearly payment increase rate at any time.

Manage your policies anytime, anywhere

When you open an account with Scottish Friendly, we’ll give you access to My Plans. My Plans is our online management tool where you'll be able to view and manage your Scottish Friendly investments quickly and safely.

You can do it at a time and place that suits you, from the comfort of your home, work or wherever you have access to the internet, using our mobile friendly site.

No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.