Even the most switched-on investor can find the jargon surrounding individual savings accounts confusing. With the April 5 deadline for putting money into an ISA an annual call to action for savers, it pays to make sense of the financial terms you’ll encounter so you can make an informed decision when using this year’s allowance.
Jargon falls into three broad camps: the basics of how an individual savings account works; the different types of ISA available; and more technical terms relating to investing in a stocks and shares individual savings account.
ISA jargon – the basics
For newcomers, the terminology surrounding how they work can be off-putting. Yet understanding fundamental terms can help you start your investment journey.
Additional permitted subscription
Spouses and civil partners are entitled to an additional allowance when an ISA holder dies. This additional allowance is awarded on top of their existing £20,000 a year allowance, and is the equivalent to the value of their deceased partner’s existing ISA.
Read the Wise Living guide to ISA inheritance tax rules.
Annual or monthly interest
Cash ISAs pay tax-free interest on your money. This may be paid monthly or annually on the anniversary of when you opened the cash individual savings account.
Many of today’s individual savings accounts are flexible. That means you can withdraw money from your ISA and replace it in the same tax year without it counting towards your annual allowance.
ISA (Individual Savings Account)
An ISA – short for Individual Savings Account – is a tax-efficient wrapper that you can put money into and either save it as cash or invest in different assets such as bonds or equities. You can hold different types of individual savings account and move money from one ISA to another. You can open only one cash and only one stocks and shares ISA each year.
This is the maximum amount that you can pay into a cash and/or stock and shares ISA in any one tax year, which runs from 6 April to the following 5 April. The allowance for 2019/20 is £20,000.
Read the Wise Living guide to ISAs and ISA allowances.
You’re free to move your money from one type of individual savings account to another without incurring a tax penalty. You must follow a specific process to transfer your ISA to ensure it doesn’t lose its tax-efficient wrapper.
Switching from one provider to another is simple. Deciding to transfer from a cash to a stocks and shares ISA, for example, can be a vital first step in delivering a more rewarding financial future.
Read the Wise Living guide to how to transfer your ISA.
Some types of cash ISA accounts require you to give up to 180 days advance notice when making a withdrawal. It’s possible to access your money earlier, but you’ll usually forfeit an equivalent amount of interest to the notice period.
ISA jargon – types of ISAs
There are several different types of individual savings account. Knowing the different types of ISA available can help you pick the right one for you.
A cash ISA is simply a tax-free savings account. It’s similar to a standard savings account in bank or building society, except it has a tax-efficient wrapper. There are lots of different types of cash ISA, from regular savings to easy access.
Help to Buy ISA
Designed to encourage savers to put aside money for a home deposit, it offers a government bonus of 25% when used to help buy a home. You can invest up to £12,000 over several years, however Help to Buy was closed to new customers from November 30, 2019.
Read the Wise Living guide to Help to Buy ISA alternatives for savings and investments.
Innovative Finance ISA
This is a new type of individual savings account, introduced in 2016, which allows loans made through online peer-to-peer lending platforms to be sheltered from tax – in this case, the interest repaid by borrowers is free of income tax. As much as £20,000 can be added to an Innovative Finance ISA in the first year.
These are cash or stocks-and-shares ISAs aimed at children. The annual limit for 2019-20 is £4,368. A Junior ISA is set up for a child and the money invested can be accessed only by the child when they turn 18.
Introduced to help those aged between 18 and 40 to save either for a property deposit or for their retirement. You can hold cash or stocks and shares in a Lifetime ISA, and the government award a 25% bonus if funds are used to buy your first home or to help finance your retirement over the age of 60.
Stocks and shares ISA
A stocks and shares ISA is a tax-efficient wrapper for your investments. You can invest money into a whole range of assets – from government bonds to equities. Stocks and shares ISAs have the potential to outperform cash ISAs but as they’re linked to the stock market, the value of your investments could fall, and you may get back less than you invested. Any gains made on assets in a stocks and shares individual savings account are free from both capital gains tax and income tax.
ISA jargon – investing
Investing in stocks and shares means dipping into a world of financial jargon, from equities and tracker funds to capital gains tax.
An actively managed portfolio is one that is managed by experts. A professional fund manager will select investment assets for your portfolio and then monitor the performance of these assets, along with market conditions such as political, economic and social developments. They will make investment decisions on your behalf with the aim of outperforming the market.
Annual management charge (AMC)
Many investment portfolios and funds incur an annual fee, usually a small percentage of the money you’ve invested. Many actively managed funds, for example, will charge around 1% of the money you have in the ISA.
Capital Gains Tax (CGT)
A tax levied on gains made from selling an asset at a profit. Everyone is entitled to an annual CGT allowance – which this year is £12,000. Capital Gains Tax is levied above this threshold, and is currently 10% for basic rate taxpayers, and 20% for higher rate tax payers.
Companies sell bonds as a way to raise money and they are effectively a certificate of debit which the company repays with interest. Popular with investors, they are viewed as lower risk than shares.
A dividend is a proportion of a company’s profit that is divided among shareholders, which is viewed as income you have earned by owning those shares. Company boards set the amount of dividend to be paid out per share.
A collective name for shares. Derived from the fact that when buying shares, you are purchasing an equity stake in the business. This means you can vote at annual general meetings and are entitled to dividend payments.
Fixed interest securities
Securities can be issued by companies or governments and promise to pay interest at a fixed rate for any money they borrow. Examples include government bonds – known as gilts or gilt-edged securities – due to their relative low risk.
A fund manager makes investment decisions for an investment fund, such as which assets to buy and how to best generate growth for investors. They are responsible for the day-to-day running of the fund.
Index tracker or passive funds
Trackers are an investment fund made up of shares from an index, such as the Nasdaq or FTSE250, with shares weighted to the companies making up the index. The fund blindly tracks the performance of the index, rising when the market rises and falling when the market falls.
A fund is a way for similar investors to pool their money together and buy a range of different assets such as corporate bonds or equities. It is usually operated by a fund manager who makes investment decisions on behalf of the fund investors.