ISA stands for Individual Savings Account and it's simply
a special type of savings and investment account, which
is immune from tax. Think of an ISA as having a protective
tax free wrapper. An ISA isn't an investment itself,
but more of a protective box into which you can put
savings or investments.
ISAs
were introduced in 1999. They replaced a similar scheme
called PEPs, which had been around for twelve years
before then.
As an incentive to save, any interest earned on
savings or bonds and any capital gains made
on investments held within an ISA are tax
free. This is particularly good news for
people on higher incomes who are taxed at
the rate of 40% on all their savings and
investment income.
There
are limits to how much money you can put into an ISA
in each tax year (the tax year runs from 6 April to
5 April). Once each tax year is finished, you cant
put any more money into your ISA for that tax year,
but your money can remain invested and free from tax,
for as long as you like (or until the government changes
the rules relating to ISAs!).
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There
are two main types of ISA:
MINI
ISA
You
can put money into two mini ISAs each tax year. You
can have a cash mini ISA and/or you can have a stocks & shares
mini ISA. You can put up to £3,000 in your cash
mini ISA and up to £4,000 into your stocks and
shares mini ISA.
Also,
you can have a cash mini ISA with one company and a
stocks & shares mini ISA with another. This is
useful as investment companies, which traditionally
offer stocks & shares ISAs, often don't offer great
interest rates on cash ISAs. The best cash ISA rates
are usually offered by banks and building societies.
Cash
mini ISAs are by far the most popular form of ISA.
More than 9m of us took one out in 2004/05, saving
an average of around £2,200. By way of comparison,
only 1.2m of us took out a stocks and shares mini ISA,
investing an average of around £1,200.
MAXI
ISA
You
can only put money into one maxi ISA each year. You
can invest up to £7,000 each year, in a mixture
of stocks and shares or cash . However, you can only
put a maximum of £3,000 in cash into a maxi ISA
whereas you can invest all £7,000 in stocks and
shares if you like. Most people who opt for maxi ISAs
seem mainly interested in the stocks and shares component.
In fact, stocks and shares account for roughly 98%
of all the funds that go into maxi ISAs.
So
which type should you go for? The main thing is to
decide how much you would like to invest in stocks
and shares. If you want to invest more than £4,000
then your better off going with a maxi ISA. If you're
likely to invest less than this amount, then go for
the mini ISA instead. This way, if you want to, you
can be free to look around for a separate cash ISA
provider to get the best rate possible.
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ISAs - Individual Savings Accounts
