What is The Best ISA for an 18 Year Old?

What is the best ISA for an 18 year old? That’s an important question for fathers who want their teenagers to start seriously saving. An ISA (stands for individual savings account) is a tax efficient way of saving as all interest and profits are protected by a tax-free wrapper in the UK.

So how do you choose the right type of ISA for an 18 year old?

Best ISA for an 18 Year Old – What Types of ISA Are There?

If you thought that ISAs were just cash savings accounts then you’d be wrong. There are actually six different types of ISA such as:

• Cash ISA
• Stocks and Shares ISA
• Junior ISA
• Lifetime ISA or ‘LISA’
• Help to Buy ISA
• Innovative Finance ISA

The last four of these are quite specialised (plus Junior ISAs mature when you turn 18, so it’s out anyway). So instead I’m going to focus on the first two and choose from them which is the best ISA for an 18 year old.

Cash ISA – Is It the Best Choice for You?

Before we go any further I’m no financial expert or adviser. If you need financial advice then you should hire a financial adviser, not base big financial decisions on the word some guy on the internet.

A cash ISA might seem like a good choice if you’re 18. You can open many for £1 and you can pay up to £20,000 in a year and all of the interest you receive is tax free. Hurrah.

There are a couple of drawbacks with this: Firstly the rates being offered at the moment for cash isas is fairly poor – around 1 percent. Secondly, you already get a tax free allowance on income from savings and investments so the tax break isn’t really much of a benefit. You could get a better rate in a normal savings account and not pay any tax.

Cash ISAs are fine if you want somewhere to keep some ready cash for emergencies but it doesn’t form a big part of my investment strategy.

The Fidelity ISA is where I put my ££ – it’s got a great, user friendly platform and reasonable charges.

Best ISA for 18 Year Olds – Stocks and Shares ISA

Here’s the deal – when I was 18, the idea of putting money into stocks and shares terrified me. But then a couple of years later, I worked over the holidays selling Christmas trees and made a big wad of cash (well for a 20 year old in 2004).

So I put it in a stocks and shares ISA. And it grew and grew. But more on that later.

A stocks and shares ISA lets you invest up to £20,000 in the same tax free wrapper. You can put it into a mixture of stocks, bonds, cash, gold, property and even ETFs (exchange traded funds).

Over time, the returns from stocks massively outstrips any interest you can make on cash right now. For more on this read this.

If you’re young (say 18) you are well placed to harness the power of compounding interest. That’s to say that your investments will improve significantly over time with modest gains. Check out my graph below:

Look what happens to £1000 over ten years with compounded returns of 7.5% – it doubles.

The sooner you start saving, the better your returns could be. Some providers let you buy individual stocks (you’ll pay dealing charges and stamp duty on this) or invest in ready packaged funds. Note that your investments can go up as well as down so you have to be a little bit brave.

I personally invest in the Fidelity Stocks and Shares ISA. This isn’t a paid endorsement – I’ve invested with them for nearly three years and their platform is excellent along with good customer service. I’ve seen really great returns and income from my investments and would recommend the service to anyone that asked.

You can learn more about their service (and invest from as little as £50 here).