What Can an ISA do for Me?
Individual Savings Accounts, or ISAs, have become increasingly popular since their introduction in 1999. These accounts were designed to replace the often-criticised PEPs and TESSAs which had been developed during the previous government.An ISA is essentially a tax-free savings account. Two different types are available, the Mini and the Maxi ISA, each with different limits to how much you can save (known as the subscription limits). You can invest up to £5,100 per tax year in a cash ISA, and up to £10,200 in a stocks and shares ISA, for the 2010-11 tax year. There is no minimum investment and, as a result, these are a considerably more attractive proposition for the majority of small investors than PEPs or TESSAs, which set minimum investment limits at £3,000. ISA limits will rise with inflation as of 2010.
Two-part SavingsISA investments can be made up of two different elements. The most widely used of these is the cash part. Most people use ISAs simply as a fairly high-interest cash savings account. This is particularly useful for those who have surplus finances but could need to get to their cash quickly - many banks now offer instant access cash ISAs, for which they may even offer cash cards, enabling you to get to your cash straight away. You should remember, however, that the number of withdrawals you make does not affect the subscription limit.
The second part of the ISA scheme is the stocks and shares element. A proportion of your ISA investment can be made up of shares and public debts such as bonds. Although the interest rate granted on most ISAs is directly related to the rate of inflation, the value of stocks and shares can, of course, fluctuate. As a result, if you choose to use this part of the ISA, yours could be a high-risk investment.
Tax FreeThe great selling point of the ISA is that the taxman can't get to your investment. You will pay no tax on income or capital gains. So, as well as not paying income tax on the interest you make, you would also pay no tax on share dividends or capital growth of your shares. This makes ISAs a particularly attractive proposition for those who are already thinking of investing in shares through a unit trust, in which their investment is combined with that of many others. This is the way most high-street share options on ISAs operate.
In 1999, the Government introduced the Charges, Access and Terms, or CAT, standards. This voluntary code allowed ISA providers to declare their willingness to meet keep charges to a minimum, allow quick access to cash, and fix their interest rates to inflation. The majority of financial institutions providing ISAs have now either signed up to the terms, or follow them without being an official signatory. Generally, you should not invest in an ISA which does not grant the terms outlined in the CAT guidelines.
In conclusion, an ISA is an excellent option for those with a fairly small sum to invest, as it offers a better net interest rate than the vast majority of other saving options. Similarly, an ISA represents an excellent way of keeping your first £5,100 worth of savings tax-free, if you have more than this sum to invest. If, however, you are looking for large short-term gains, the stocks and shares option may not be ideal for you. In these cases, you might consider a managed trading account with a specialist provider, which is covered in an article elsewhere on this site.