Saving for the future is an essential part of financial planning. It’s basically the whole reason we do it. Whether it’s saving for your first house, to top up a pension, or to leave something for your children – having financial goals for the future is why we pay attention to our money.
There are lots of different options when it comes to the best options for saving for the future. And, unfortunately, we can’t predict which one will be best for you just in this blog post. The best options for each person will depend on their specific financial goals and their current situation. What we can do, though, is give you a guide to one specific product that’s frequently used for saving for the future: the Individual Savings Account, or ISA.
There are lots of different products and types of ISAs. Here’s our guide to each one, and when they might be most useful to help you save for the future.
Cash ISAs vs. Stocks and shares ISAs
One important thing to remember before we get started on the specific types of ISAs is that each type is also offered in both cash and stocks and shares versions. Both versions do what they say on the tin: cash ISAs hold your money as cash, stocks and shares ISAs mean your money is invested into the stock market. These different products will have different rules for accessing your money and for interest, but this can vary between products and banks.
We’ve written about the differences between cash and stocks and shares ISAs before, but, in general, cash ISAs are ideal if you want a short-term savings product where you might need to access the money. Stocks and shares ISAs tend to be better over the long term (as we’re discussing in this blog post), but you’re exposed to more risk as you could lose money if the value of the assets in your ISA goes down. We can’t give guidance on the best specific products in this blog post, so it’s worth shopping around or speaking to a financial advisor.
For general savings, the tax benefits of ISAs make them worth investigating. However, there are limits to the amount you can open and save into each year (one stocks and shares, and one cash). Because of this, when it comes to saving for future generations, we’d recommend looking at Lifetime ISAs or Junior ISAs. The government bonuses for these make them far better than regular ISAs if you’re going to be saving for the long term.
Saving for your first house, or to top up a pension: the Lifetime ISA (LISA)
Introducing… the Lifetime ISA! This type of ISA is a go-to product for those looking to save for their first house (since the Help to Buy ISA was discontinued) or save for retirement (alongside their pension).
The real draw of LISAs is that they come with a 25% government bonus – but only if you use them according to the restrictions. You’ll get the bonus, worth up to £1,000 per year, but only if you withdraw the money either to buy your first home, or when you turn 60. If you withdraw the cash for any other reason, you’ll be charged a fee to withdraw it. The fee is currently 20% but goes back to 25% on 6th April 2021 – so you’ll actually lose more than you paid in, if you withdraw.
This makes LISAs a good way to save for the future, as you’re essentially locked in to using them in the right way. If your kids are saving for their first house, supporting them by topping up their LISA is a great option. If you’re looking to save for retirement, you should first look at whether you can pay more into your pension, but a LISA is a good option to augment your pension savings.
Saving for your children: the Junior ISA (JISA)
A Junior ISA is a great, tax-efficient way to save money for your younger children. You can save up to £9000 per year tax-free per child. The money belongs to your children, and they’ll take control of it when they turn 16, but they can’t withdraw until they turn 18. If you want to build up a lot of savings for your children, this is a great way to do it.
If you’re saving for your children directly, another option here is to use Child Savings Accounts – but it’s worth being cautious about interest rates and tax here. If the money is given directly to the children by their parents (and not grandparents or other relatives), there’s a £100 limit on interest earned before the children have to pay tax themselves. These savings accounts are often good to use for children to pay smaller amounts of money into themselves, but for long term, large savings, they don’t make much sense in terms of tax efficiency.
Looking for specific advice for saving for future generations? Speak to GreenSky Wealth. We’ll take the time to understand your financial needs and can advise you on the right tax-efficient products for you. Get in touch with us here.