Isas 2018: How to mix and match

Isas have proliferated in recent years: there are now six different types, including stocks and shares Isas, junior Isas (Jisas), the soon-to-be extinct Help to Buy Isa, and the more recent Innovative Finance and Lifetime Isa and Lifetime Isa and cash Isas.

If deciding how to invest your Isa feels tricky, working out just how many Isas you can take out in a single tax year without breaching your allowance can feel like just as big a headache.

You can mix and match your £20,000 allowance whichever way you like between cash, stocks and shares and peer-to-peer (P2P) investments, but there are certain types of Isa you cannot pay into at the same time, in the same tax year. Jisas, Help to Buy Isas and Lisas also have lower subscription limits.

It is important to remember that you can hold Isas from different tax years with different providers but you cannot fund the same kind of Isas, even with different providers, within the same tax year. You do not need to transfer those when you open a new account as long as you do not pay into them within the same tax year.

The less obvious Isas you cannot mix and match are a cash Isa and a Help to Buy Isa. The Help to Buy Isa allows savers to build up savings for a house and receive a government bonus and was the first iteration of the new Lifetime Isa. Unlike a Lifetime Isa, the Help to Buy Isa is a cash-only product and anyone wanting to open one before new subscriptions close on November 30 2019 must first close their cash Isa. Some providers, including Aldermore, offer a way around this by offering split accounts, which let you fund cash and Help to Buy Isas simultaneously.

The myth of the flexible Isa

Flexible Isas were introduced in April 2016 and theoretically allow investors and savers to withdraw money from an Isa and put it back again without using up their annual allowance.

In the past, any money taken from an Isa could not be replaced within that tax year. Now, an investor can theoretically subscribe £20,000 into an Isa, take £2,000 out within the tax year and then put it back. In the past this would have breached the £20,000 Isa limit, but that is no longer the case.

Flexible Isa rules apply to cash Isas, flexible Isas and cash held in a stocks and shares Isa. Junior Isas, Help to Buy Isas, Lifetime Isas and any element of a stocks and shares Isa that is not cash — that is, shares, bonds or funds — are not flexible.

Despite launching more than a year ago, though, banks and brokers have been slow to pick up on the flexible Isa. It is not compulsory for banks and brokers to offer them and brokers in particular have not rushed to launch the functionality.

Banks including Tesco Bank and Virgin Money automatically offer flexible Isas to all customers, but others including RBS, HSBC and NatWest do not. There are 15 flexible fixed-rate cash Isas currently on the market according to Moneyfacts and most brokers and investment platforms do not offer it and do not plan to. Exceptions include Barclays, Charles Stanley Direct, IG and Rathbones.

Jane Sydenham, Rathbones investment director, says: “Flexible Isas can be a good tool for cash management. In the past, if you had a cash crunch and took money out of your Isa you couldn’t put it back in again. Although it is best to leave money in your Isa, sometimes life isn’t as neat as we would like and this can be a good way to manage that.”

The Lisa loophole

Time is running out to make use of a Help to Buy Isa loophole which could net savers an extra £1,100 bonus from the government for a first home by transferring it into a new Lifetime Isa before the end of the tax year.

Both the Help to Buy Isa and Lifetime Isa (Lisa) were designed to help young people get a foot on the property ladder. The Help to Buy Isa was launched in 2015 and allowed savers to put in an initial lump sum of £1,200 and £200 a month after that, eventually receiving a 25 per cent bonus from the government at the point of buying a first home. The Help to Buy Isa is soon closing — no one will be able to open a new account after November 30 — but savers can pay money into existing accounts until November 2029.

The Lisa, launched in April 2017, is more flexible than its older cousin. Up to £4,000 can be saved every year in cash or stocks and shares and it can be opened by those between the ages of 18 and 39, although they can pay in up to the age of 50. The government awards a 25 per cent bonus on any amount saved each year and it can be used to buy a first home or accessed after your 60th birthday. If withdrawn early, for another reason, investors face a 25 per cent penalty on the amount saved.

Until April 6 this year, anyone who opened a Help to Buy Isa before the launch of the Lisa can transfer the whole balance into a Lisa without breaching the usual £4,000 limit and earn a 25 per cent bonus on the whole amount.

A saver subscribing the maximum into a Help to Buy Isa since launch could have saved a total £4,400. That amount could then be added to a Lisa where it would attract a 25 per cent government bonus of £1,100. Savers would still have an extra Lisa allowance of up to £4,000 and receive a 25 per cent government bonus on that amount too, of £1,000.

According to AJ Bell, if that saver continued to contribute the maximum £4,000 to their Lisa for the next four years, with the government bonus and investment growth of 5 per cent they would have a fund of just over £35,000 — more than the average deposit for first-time buyers of £33,000 (based on Halifax data).

According to AJ Bell, a fifth of new Lisas opened on its platform between December and January have been from Help to Buy transfers.

After the April deadline expires, you will still be able to transfer from a Help to Buy Isa into a Lisa, but it will eat up your annual allowance. If you choose not to transfer and end up with both a Help to Buy Isa and a Lisa, you’ll only be able to get a bonus on one of them to spend on your first property.

Where can I open a Lisa?

Despite much hype, fund platforms have been slow to offer Lifetime Isas and there is only one cash Lisa on the market. Nine providers offer Lisas, including large DIY investment platform Hargreaves Lansdown, The Share Centre and AJ Bell Youinvest and robo-investment managers, including Nutmeg and Moneybox.

Skipton is the only major building society to have launched a cash-only version of the Lisa and the most recent entrant to the market was Brighton-based mutual OneFamily. The company launched a stocks and shares Lisa this month with an annual management charge of 1 per cent.

Lisas vary from those offering ready-made fund portfolios, including Nutmeg, OneFamily, the Share Centre and MoneyBox, to those offering investors the ability to choose exactly what funds and shares they want to put in their Lisa.

Nutmeg and Moneybox offer a variety of portfolios categorised by risk, made up of low-cost passive funds. The Share Centre also offers off-the-peg portfolios but these are made up of active funds too.

Hargreaves Lansdown and AJ Bell both allow investors to choose from investment trusts, exchange traded funds (ETFs) and open-ended funds and charge tiered fees based on the value of assets held.

AJ Bell offers the cheapest Lisa, with an annual platform charge of 0.25 per cent, plus additional fund charges. This compares with a 0.45 per cent annual charge at Hargreaves Lansdown on portfolios of up to £250,000 (additional fund charges also apply). Nutmeg charges 0.75 per cent on assets up to £100,000 and 0.35 per cent beyond that, as well as an average 0.19 per cent for its funds.

Moneybox charges £1 a month and 0.45 per cent of the value of your investments a year. Unlike other providers, the Share Centre does not charge an annual administration fee but charges more for its funds — between 1.69 per cent and 1.89 per cent.