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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.

Full Guide to UK Investing / investments

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