ISAs Explained

ISAs Explained

Individual Savings Accounts (ISAs) are a way of saving and investing without paying any tax on the returns you make. ISAs were launched in the UK in 1999 to encourage people to save.

They allow you to earn interest on your savings without paying tax on it, and to invest in stocks and shares without being liable for tax on any returns you make.

ISAs were introduced to replace Personal Equity Plans (PEPs). Initially savers had the option of a mini ISA, which allowed investments in either cash or stocks and shares, or a maxi ISA, which combined both elements in one account.

The two current types of ISA , cash ISAs and stocks and shares ISAs, which replaced the mini and maxi ISAs in 2008. There are also innovative finance ISAs which involves lending to small business and the lifetime ISA which will be released in 2017. The lifetime ISA can help you save for a new home or your retirement and offers government bonuses to help you reach your goal.

What are the Benefits of an ISA?

For UK residents, ISAs are an excellent way of saving - in fact, they should be your first savings port of call in order to avoid paying tax unnecessarily on your investments.

1. 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
2. The secondary benefit is that you are saving some of your income

Whether you've a particular savings goal in mind or you just want to ensure you've got an emergency fund tucked away, an ISA can provide a simple way to help achieve this.

There are many ISA’s to choose from so it’s easy to be left wondering which ISA is right for you. Comparison tables can be a great way to start. Follow the links provided to find more information on any of the products mentioned on our tables.

How do I Choose an ISA?

When choosing an ISA, there are a number of things to consider. We’ve highlighted some of the most important factors below:

1. Timescale of your investment - If you need access to your money and you are not looking to invest for the long term you should consider a Cash ISA. Many of these are easy to manage and allow you to withdraw money at any point. However, if you are happy to tie up capital for the medium to longer term you may wish to consider a Stocks and Shares ISA which has the potential to provide better returns then a Cash ISA over the longer term
2. Attitude to investment risk - If you are not prepared to lose money then a Cash ISA is probably the better option for you. It good to remember that, over the long term, inflation can erode your capital in real terms so getting a good rate of interest on your cash ISA should be a priority. If you are prepared to risk capital to achieve higher potential returns then a stocks and shares ISA may be the best option for you.
3. Charges - Different ISA plans will have different charges. It is important that you are aware of what these are and how they could affect your ISA performance. These could be charges for transferring or closing an account early or a management charge which is applied to most stocks and shares ISAs. 

Which ISA is Right for You?

This depends on your savings goal and the amount or risk you’re willing to take. It’s generally advised that if you have debts, don’t have any other form of savings or will need to withdraw your cash in an emergency then you shouldn’t invest as your capital is at risk. It’s also difficult to withdraw your money quickly as you will need to sell your assets, even transferring can take 30 days or more.

If you do have some spare income, however, investing is a good way to see high returns on your money, as long as you are aware of the risks.

As another option, with certain types of Cash ISAs, you have instant access to your money, which makes it a flexible way to plan your finances. Alternatively, fixed rate ISAs are a good way to see guaranteed returns on your capital, if you can tie up your money for a year or more.

Is there a Charge for Transferring an ISA?

Your existing ISA manager cannot stop you transferring, but they may charge you for it. However, this is becoming less common, particularly with cash ISAs. You should contact your current ISA provider and confirm their policy on this before making a decision.

Are there any ISA Rules?

The rules on ISAs have been relaxed since April 2016 and you can now choose how you split your savings. While ISAs can be straight forward, there are some rules to follow and it’s useful to know before you get started:

• Some accounts have penalties if you withdraw early, particularly fixed rate accounts. Be careful to check your provider’s rules as you could leave with less than you invested if you close early
• You must use a transfer form if you want to transfer accounts. If you don’t follow the transfer procedure and simply withdraw the money yourself then you lose all tax benefits for that year
• Transferring your ISAs should take no more than 15 days although transferring from a cash ISA to a stocks and shares ISA can take longer
• You can’t have more than one account of the same type
• ISAs are a good idea whatever your savings goal. With certain types of cash ISAs, you have instant access to your money, which makes it a flexible way to plan your finances. Otherwise you can potentially receive higher returns by tying up your money or investing.

It’s also important to remember that ISA allowance limits apply to everyone on an individual basis, so if you’re married or in a relationship, you can both hold your own ISA, each with the full allowance. This can make them an excellent way to save for large expenses such as a property, a holiday or a new car.