A 27-year-old worker who wants to start saving has been urged to consider opening an Isa, after financial experts outlined how to balance emergency cash, pensions and longer-term investments.
The saver is already in full-time employment and contributes to a company pension, but has limited spare money. Experts said there was no need to wait until a large sum had built up before making use of an individual savings account.
Isas can shelter interest, investment gains and dividends from tax. The main options include cash Isas, stocks and shares Isas, Lifetime Isas, innovative finance Isas and Junior Isas.
The rules are also set to change in April 2027. The amount that can be paid into a cash Isa will fall from £20,000 a year to £12,000, although the overall annual Isa allowance remains £20,000, including money paid into a Lifetime Isa.
Build an emergency fund before investing
Charlene Young, head of technical at AJ Bell, said the first priority should be clearing expensive short-term debts, such as overdrafts and credit cards, before building an emergency fund.
She recommended aiming for around three months’ worth of essential spending. This money should be held somewhere readily accessible, such as an easy-access cash Isa or savings account.
Whether a cash Isa or another savings account is more suitable will depend on the interest rates available and the saver’s income tax position. Most people can receive some interest tax-free through the personal savings allowance, which is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. The allowance is withdrawn for additional-rate taxpayers.
Savers should compare rates and check when any introductory or bonus offers expire, as they may need to move their money when the promotional period ends.
April Leeson, a senior chartered financial planner at The Private Office, said contributing to a workplace pension was also a positive step because it could provide income in retirement and ensure the saver received their employer’s contributions.
She said there was “no minimum amount that makes an Isa worthwhile”, although some providers might require a minimum deposit. Starting early and saving regularly was more important than waiting until a larger amount was available.
When a stocks and shares Isa may be suitable
Money that may not be needed for at least five years could be considered for investment, experts said. A stocks and shares Isa allows investments to be held tax-free, but their value can rise and fall with the markets.
Young savers may have time to withstand short-term falls, although investing is not suitable for emergency funds or money that may be needed soon. Keeping a cash reserve can allow investments to remain untouched during market downturns.
Young said that investing regularly did not require a large lump sum. She said putting £50 a month into a stocks and shares Isa could grow to nearly £8,000 over ten years, illustrating the potential effect of investing small amounts consistently.
Regular payments can be automated, with the saver choosing in advance which investments they will buy. However, stocks and shares Isas can involve charges, unlike cash Isas, which do not usually cost anything to open or maintain.
Using a Lifetime Isa for a first home
A Lifetime Isa could be considered by someone under 40 who is saving for a first property. Up to £4,000 can be paid in each year, with the Government adding a 25 per cent bonus.
There are restrictions. The first home must cost £450,000 or less, and the account must generally have been open for at least 12 months before it can be used for a purchase.
Withdrawals for other reasons before the age of 60 will normally incur a 25 per cent charge. This means a Lifetime Isa may be unsuitable for money that could be needed in the short term.
A Lifetime Isa is reportedly due to be replaced by a new First Time Buyer Isa in April 2028, although the details have not yet been set out. Until then, eligible savers can still open a Lifetime Isa and continue contributing.
Experts said it was possible to use more than one type of Isa, provided the annual allowance was not exceeded. Combining accessible cash savings with longer-term investments may help savers match their money to when they expect to need it.
