Guide to ISAs
Individual Savings Accounts made simple
What is an ISA?
Types of ISA
Cash ISAs
Stocks & shares ISAs / Equity
ISAs
How much can I invest
in an ISA?
Major changes to ISA rules from
2008
Choosing between Cash Isas or
Equity ISAs – what’s best?
How to get an ISA
Self-select ISAs
Today's
Latest Best Buy Cash ISAs Tables
What is an ISA?
An Individual Savings Account or ISA is a
tax-advantaged means by which investors may save and invest
without incurring income tax or capital gains taxes on the
proceeds.
An ISA is not an investment in itself but
rather a "wrapper" to shield your investment -
whether it be cash or equities - from being taxable.
The tax breaks are on exit, not entry. So
there is no tax relief on the money you invest in your ISA,
just on the profits;
With a cash ISA, for example, the interest
you earn will be tax-free. And if you sell stocks and shares
you have in an equity ISA there will be no tax to pay on
the profits.
ISAs can be a useful tax-free savings vehicle
and can be used as part of a long-term financial planning
/ investing strategy. You could, for example, pay the amount
saved in an ISA into a pension later on.
Types of ISA
There are two types of ISA:
Cash ISA
Stocks & shares or equity ISA
Cash ISAs
Cash ISAs are effectively savings accounts
but the interest is not taxed.
Most banks and building societies offer cash
ISAs for investing in but the terms and conditions differ
between products and institutions.
For example, some accounts require a minimum
deposit when you open the account or a notice period before
you can withdraw the money.
Some accounts are run solely online.
See the latest best buy tables for the best
cash isa
Equity ISAs
Equity ISA plans are sold by stockbrokers,
IFAs, fund managers, banks and other authorised financial
institutions.
You can buy a plan and take advice on what
to put in it, or you can have a 'self-select' ISA
and make your own decisions.
Unit Trust and Open Ended Investment Companies
(OEIC's) are the most commonly used investment for equity
ISAs.
How much can I invest in an ISA?
At the time of writing you can invest up to
£7,200 in total in an ISA.
However only £3,600 can be saved in a cash ISA each
year.
So, in practice, you might invest £3,600
in a cash ISA and £3,600 in an equity ISA or the whole
£7,200 in an equity ISA.
What’s changed with ISA rules?
ISAs have been around since 1999.
Previously there were mini ISAs
and maxi ISAs.
Mini ISAs were either cash or equity while
a maxi ISA combined the two.
However the set-up was considered confusing
so mini and maxi ISAs were scrapped in April 2008 and replaced
by cash ISAs and stocks and shares
ISAs (aka equity ISAs).
At the same time the tax free allowance for
every UK adult was raised from £7,000 to £7,200.
Other changes include the scrapping of Personal
Equity Plans or PEPS which were
the forerunners of ISAs.
Existing PEPs became stocks and shares ISAs
and subject to exactly the same rules and tax breaks.
Also from 6th April 2008...
Savers have been able to switch balances
held in cash ISAs, into a stocks and shares ISA, which makes
it easier to increase your exposure to stock market investments.
But if it doesn't work out, bear in mind you
can't transfer the money back to a cash ISA.
Cash Isas or Equity ISAs– what’s best?
Whether a cash or equity ISA is best for you depends on
your attitude to risk and whether you’re investing
for the short or long term.
Equities ISAs have the potential for higher
returns over the long term and there is the opportunity
for growth both in capital and income.
They’re more risky although risk can be spread by
investing in unit and investment trusts.
Cash ISAs, on the other hand,
are more secure if you cannot afford to lose your initial
capital and would be worried by stock market volatility.
A Cash ISA also offers you access to your
money at short notice so is ideal as a cash emergency fund.
Buying an ISA
Cash ISAs are fairly easy
to open and can be opened in a bank or building society
branch, by post or phone or online.
Equity ISA plans are sold
in three main ways:
• direct
• via intermediaries
• self-select
Buying Equity ISAs direct
You can buy ISA plans direct from fund managers.
Fund managers are the companies that run
collective investment funds such as unit trusts, open-ended
investment companies (OEICs) and investment trusts.
They decide which stocks and shares to buy.
Buying ISAs via Intermediaries
Buying through an intermediary can be a better
option because they give a bigger choice of funds from a
number of different fund managers.
An intermediary could be a bank, building
society, independent financial adviser, broker, investment
manager or stockbroker.
Self-select ISAs
Alternatively you can get a self-select
ISA.
A self-select ISA means taking the existing
ISA wrapper and then choosing shares or a combination of
funds to shelter within it.
You choose from a number of investments from
managed funds such as unit trusts, open-ended investment
companies (Oeics) and investment trusts, plus individual
equities, gilts and bonds.
Self-select ISAs are generally sold by stockbrokers.
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