An Introduction to Individual Savings Accounts (ISA)
An ISA is a tax-efficient way of investing or saving, open to every adult in the UK. Up to £7,200 can be invested each year, with no income tax or capital gains due on the interest earned or return paid.
The figure of £7,200 isn't quite as simple as it seems, as there are restrictions.
Deposit Limit
Firstly, that is the total amount that can be deposited in a year - not simply the amount added to the account by the end of each year. This means that if you deposit the full £7.2k at the start of a year and then subsequently withdraw some of the funds, you can't top it up again later as you've already used your full deposit amount.
Cash, Stocks and Shares, or Both
Secondly, investments under the ISA can either be in cash (i.e. like a normal savings account), or in stocks and shares. The cash component of the ISA is limited to £3,600 a year, and anything above that must be invested in stocks and shares. Alternatively, the whole yearly allowance can be invested in stocks and shares if you wish.
Are ISAs Worth It?
For people with significant amounts of savings, ISAs might seem to be hugely worthwhile given the limited amount you can invest in one each year. This is especially true with purely cash ISAs as a short term investment, as the interest rate isn't usually much different than the better savings accounts out there, and the tax savings on a single year's investment might not be huge.
Long Term Investment
ISAs really come into their own as a long term balanced investment using bothe the cash and stocks compenents, or the full amount in stocks and shares. As the balance of the account builds up each year, the amount of tax savings grows too, and can become very significant.
Choosing an ISA
There are many ISA providers out there, offering a full range of accounts. With a cash ISA, as with savings accounts, the AER is the figure to look for - the higher the better.
The stocks and shares element of an ISA can be invested in various ways, with ethical investment options available, along with options such as high growth (and high risk) or a more stable market tracking account depending on your tolerance of risk.As with all investments, seek independent professional advice before committing yourself to any one option.
You should also check how much of a set up fee is charged, as well as annual management fees.
Transfer ISAs
Once you've picked an account, there's nothing to say you have to stick with it - you're perfectly free to transfer your deposit between different providers, providing that your overall annual deposit limit is observed. This will involve paperwork, but your new ISA provider should provide detailed advice on how to transfer your account, and make the process as simple as possible.
