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What is an ISA?
An ISA (Individual Savings Account) is a tax-free annual investment allowance launched in 1999 to replace the Pep and Tessa allowance, often referred to as a tax-free 'wrapper'.
When you put your savings, shares or life insurance fund into an ISA account, this 'wraps around' the money you put in and your income and gains from the investments and/or savings are free from tax.
There are two ways of investing in an ISA:
- Cash ISAs - Like an ordinary bank or savings account in which the interest accrues tax-free. There are regular savings and easy access options and those which fix your money in for a longer term (usually in return for a better rate). For the 2009/2010 tax year you can place up to £3,600 into a cash ISA (£5,100 for the over-50s). For 2010/2011 this wil be £5,100 for anyone over 18.
- Shares ISAs - These allow you to hold shares and stockmarket related funds inside the tax-free wrapper such as unit or investment trusts (which can invest in overseas stockmarkets, property, bonds, gilts), individual shares such as Vodafone or Barclays, and corporate bonds. For the 2009/2010 tax year the maximum you can place within a shares ISA is £7,200 (£10,200 if you're over50). For 2010/2011 this increases to £10,200 for anyone over 18.
Note on ISA limits for this and next tax year
2009/2010 tax year - If you reached 50 in the current tax year, then the full £10,200 can be invested in a stocks and shares ISA with one provider or up to £5,100 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same, or another provider.
Otherwise the full £7,200 can be invested in a stocks and shares ISA with one provider or up to £3,600 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same, or another provider.
As of April 6, 2010, a maximum £10,200 can be placed in an ISA of which maximum of £5,100 can be in cash for anyone over 18.
How do I invest in an ISA?
You can get ISAs from ISA managers. These include:
- Financial advisers
- Banks
- Building societies
- Investment firms
- Stockbrokers
- Insurance firms
- Solicitors.
An ISA manager will explain the types of ISA their company offers. Different companies can offer different ISA products.
When you buy an ISA, you pay your cash to the ISA manager, who invests it on your behalf, on your instructions, and ensures you get the tax benefits that you're entitled to, wether it's a cash or shares ISA.
When can I take my money out?
The tax benefits still apply whether or not you take your money out of an ISA.
Access to your money all depends upon which ISA you choose. Some ISA products run for specific time periods, so if you don't give the appropriate amount of notice your risk losing interest or bonuses.
Cation: With some shares ISAs and life insurance ISAs, you may end up with less money than you started with due to the nature of the investment (ie stockmarkets and share prices can go down as well as up).
If you have stocks and shares ISAs, you should be aware that the value of shares can fluctuate (if you're not aware of this, or are risk-averse, you probably should stick to a cash Isa).
Therefore, the return you receive depends on the state of the market at the time.
