With yet another type of account in the works... Which Isa is right for you?

WhILE Isas are a great tool for any saver, with six different types to choose from — and another on the way — how do you choose the right one?

All Isas share the same tax-free advantages. Whether you’re earning interest, dividends or capital gains, you don’t pay tax.

You can pay into one of each type that you are eligible for in any tax year, so long as you don’t exceed your £20,000 allowance.

From April 6, you can pay into more than one of the same type. So, if you are saving towards more than one goal, you may find you would benefit from more than one type of Isa.

here are some tips to help you decide which is right for you . . .

LONG OR SHORT-TERM

IF You are likely to need your money within the next five years, a cash Isa could be for you.

You can opt for an easy-access account, which allows you to make withdrawals, or a fixed rate cash Isa, which locks your money away for a set period of time.

the balance of your cash Isa will never fall unless you make withdrawals, unlike a stocks and shares Isa, which can experience volatility as markets rise and fall.

the value of a cash Isa could still be eroded over time by inflation if the rate of interest you get does not match or exceed inflation.

If you don’t need access to your savings for at least five to ten years, a stocks and shares Isa could be a better option.

these allow you to invest your money in assets such as company shares or bonds. Long-term, they tend to produce a better return. But they are subject to volatility, which is why a longer time frame is important, so you can ride out some of the rises and falls.

‘Investing is ideal for anyone looking to grow their long-term savings if they’re prepared to keep their money invested for five years or more to give it the best chance,’ says Derence Lee, chief finance officer at Shepherds Friendly. ‘however, it’s important to remember with investing that your capital is at risk. and returns aren’t guaranteed.’

FIRST HOME

THERE is a specific Isa designed for those saving for their first home — the Lifetime Isa (Lisas).

the money in these accounts can be used only to buy a first property or for retirement. Every time you make a deposit, the Government will add 25 pc. You can deposit up to £4,000 a year, so you could get an extra £1,000 a year towards your first property.

Lisas have strict criteria. You must be aged between 18 and 39 to open an account but, once you have one, you can continue saving into it until you are 50.

to use the money to buy a property, your account must be open for 12 months before you buy; it must be the first property you’ve owned anywhere; you have to be planning to live in it; and it can’t be worth more than £450,000.

CHILDREN’S FUTURE

IF You want to set aside money for a child, a Junior Isa (Jisa) is a great option. these work like standard Isas in that the money can grow tax-free.

Jisas cannot be accessed until the child turns 18, at which point they will have control of it.

only parents can open a Junior Isa but anyone can make deposits into it, and there is an annual deposit limit of £9,000.

‘there are both cash and stocks and shares Jisas available, with many parents opting for the cash option,’ says Laith Khalaf, at investment platform AJ Bell. ‘Given the long-term investment horizon most children would have, it makes sense for parents to consider stocks and shares.’

Jisas’ tax-free status means parents won’t risk being taxed on the interest. If you pay into a standard savings account in your child’s name and they earn more than £100 in interest, the interest will be treated as if it belongs to the parent and taxed accordingly.

RETIREMENT

IF You want to use an Isa to save for retirement, then a Lisa can give your mission a boost, too.

As well as being able to grow tax-free, you’ll get a 25 pc government bonus on anything you pay in, up to a limit of £1,000 a year.

You can’t access the money in your Lisa until you turn 60, unless you use it to buy your first home. Withdraw it and you’ll face a harsh penalty.

If you opened an account aged 18 and paid in the maximum amount until you are 50, you would pocket £32,000 from the Government on top of growth.

however, if you have access to a workplace pension, you may want to prioritise saving into this above a Lisa, as they also benefit from employer contributions.

INVEST IN THE UK

IN HIS recent Budget, Chancellor Jeremy hunt announced a new Isa would be launched: the British Isa. this will allow you to invest an additional £5,000 on top of your current £20,000 Isa allowance, so long as it is used only to buy UK investments.

the concept now has to undergo a consultation process, so it could be some time before the first British Isas are launched.

Even then, they will not be of benefit unless you already max out your current £20,000 allowance.