ISA Ideas

• Cash ISAs
• Stocks & Shares ISAs
• ISA Transfers
• Fund Supermarket ISAs
• Junior ISAs
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• Income ISAs
• Growth ISAs
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• ISAs Explained

ISAs Explained

ISAs are becoming the savings vehicle of choice for the UK public.

 

In 2010/11 ISA stocks and shares investments exceeded contributions made into pensions.

 

James Caldwell, Director

ISA Facts

Individual Savings Accounts (ISAs) are a way of saving and investing without having tax deducted from the returns you make.

ISAs were launched in the UK in 1999 to encourage people to save. They allow you to save and earn interest without paying any tax, and to invest in stocks and shares without being liable for tax on returns you make.

ISAs replaced personal equity plans (PEPs). The two current types of ISA - cash ISAs and stocks and shares ISAs - replaced the mini and maxi ISAs in 2008.

For UK residents, ISAs are an excellent way of saving and should be the first way you save to avoid paying tax unnecessarily on your investments.  

Benefits of ISAs

The primary benefit of ISAs is the tax advantage that allows individuals to profit from savings or shares without paying income or capital gains tax on that return.

The secondary benefit is that you are saving some of your income; this may be to provide financial security to help in times of need or to save for a particular goal.

Types of ISAs

ISAs are available in two main types; within this type of ISA you can choose from a range of products to create a savings portfolio tailored to meet your needs. The two types of ISAs are:

• Cash ISAs, which work like a savings account but with tax benefits
• Stocks and Shares ISAs, which allow you to invest in funds, structured investments or in the stock market for a potentially higher return

Within the two types of ISA there are a range of options to choose from. For example, cash ISA providers, such as banks and building societies, may offer both instant access and fixed rate cash ISAs allowing you to choose the best savings vehicle for you.

Stocks and shares ISAs can be invested into many different types of funds, structured investments or directly into shares allowing you to choose where you want to invest and how much risk you want to take with your money.

ISA Providers

ISA providers are known as ISA managers, which include banks, building societies, fund managers, stockbrokers and financial advisers. ISA managers must be authorised by the Financial Services Authority (FSA) and approved by HM Revenue and Customs.

While this approval of an ISA manager does not guarantee the ISA manager's performance or that any ISA investment will deliver a satisfactory return, it does provide access to regulatory procedures if things go wrong.

This includes the FSA complaints procedure, the Financial Ombudsman Scheme and the Financial Services Compensation Scheme, if applicable.

Contributions and Withdrawals

Because of the tax advantages of ISAs, there are rules governing contributions and withdrawals. Contributions are subject to annual limits, for the 2012/13 tax the annual limit is £11,280 for stocks and shares ISAs; £5,640 can be saved in a cash ISA.

If £5,640 is saved in a cash ISA then another £5,640 can be invested in a stocks and shares ISA or the full allowance (£11,280) can be invested in stocks and shares ISA.

Depending on the type of ISA or investment withdrawals may be allowed. If you have invested the full allowance during the tax year, then withdraw funds you will not be able to contribute any more to your ISA during that tax year.

ISAs are an excellent way to put money aside and reap significant tax advantages. By learning the ins and outs of these savings and investment vehicles, you can enjoy the full benefits available.

Transfers

You can transfer all of the money in an existing ISA from previous years into a new ISA even if this amount is greater than the annual allowance.

These funds must already be in an ISA and should be transferred properly to avoid them losing their tax-efficient status. Your ISA manager will normally manage this transfer.

You can transfer from a cash ISA to a stocks and shares ISA but not the other way around. So, stocks and shares ISAs can only be transferred to another stocks and shares ISA.