Individual Savings Account (ISA) represents a tax-free savings account available in the United Kingdom. The main difference between an ISA and a normal savings account is that it offers interest payments free of taxes, allowing U.K. residents to save more money.
There are four main types of ISAs, including cash, stocks and shares, innovative finance, and lifetime ISAs.
The U.K. government determines a limit for how much residents can save each financial year without charging taxes on income. For the current tax year, that limit stands at £20,000.
Another benefit of an ISA is that it can be passed on to the owner’s spouse or civil partner in case the owner passes away. Regular savings accounts do not have this benefit.
To open a cash ISA, applicants must be 16 or over. This age limit stands at 18 for those who want to open stocks and shares or an innovative finance ISA. Those who want to open a lifetime ISA must be between 18 and 40 years old.
With lifetime ISAs, money can be withdrawn when a resident is buying a first home or after reaching age 60. In addition, if a person is diagnosed with a medical condition giving a life expectancy of under a year, they can also withdraw the full savings amount including a bonus. On the other hand, other withdrawals and transfers to other types of ISAs charge a 25% fee.
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