Anyone who has ever had any experience of buying a financial product will know that many of them involve a bizarre combination of the blindingly obvious and the unnecessarily over-engineered.
Individual Savings Accounts (ISAs) are a classic example of this. The brainchild of New Labour financial whiz kids in the late 1990s, they were first introduced in April 2000.
ISA’s replaced PEPs and TESSAs and are essentially tax-free wrappers for other investments.
Therefore, technically, it would be incorrect to say I have invested in an ISA, but rather that you have invested in a share or unit trust or other asset, which you then hold within the ISA wrapper.
You can have cash ISA, a stocks and shares ISA or a mixture of the two. UK resident individuals each have their own ISA allowance subject to the minimum age regulations.
What is an ISA?
An ISA is an Individual Savings Account. If you save in an ISA, you are entitled to keep all that you receive from that investment and not pay any tax on it.
Each year, the Government sets how much you can save in an ISA and there are two types of ISAs – Cash ISAs and Stocks and Shares ISAs.
Because ISAs are tax-free it means you get a higher return on your money by using them. So it makes sense to use your annual ISA allowance, but a lot of us don’t!
Can anyone open a Cash ISA?
ISAs help you to save tax-free and your tax position depends on your personal circumstances. Generally, as long as you are a UK tax resident, or a Crown employee serving overseas, or married to or a civil partner of a Crown employee serving overseas, and are over 16, you can open a Cash ISA, or if you are over 18, you can open both Cash and Stocks and Shares ISAs
How many ISA’s can I have?
You can only open - one Cash and one Stocks and Shares ISA each tax year, but there’s no overall limit to how many ISAs you can have over different tax years. You can keep an ISA going after the end of the tax year when you opened it so it is possible to have lots of ISAs.
How much can I save in an ISA?
Each tax year – which runs from 6th April until 5th April the next year – the Government gives you an annual ISA allowance and you can save up to that amount in a Cash ISA, a Stocks and Shares ISA, or both.
Between 6 April 2012 and 5 April 2013 you have an ISA limit of £11,280, up to £5,640 of which can be placed in a cash ISA.
Depending on the account terms of your Cash ISA, you can choose to pay in the amount of your annual cash ISA allowance as one lump sum into your Cash ISA, or smaller amounts as and when you can.
What is the difference between a cash ISA and a Stocks and Shares ISA?
Cash ISA’s - is simply a savings account, but no tax is deducted.
Therefore, the gross rate advertised would be the rate applied to your savings.
Normally, tax would be deducted at 20% for a basic rate taxpayer and 40% for those on the higher rate. Therefore, to get an equivalent of a 5% net return outside an ISA, the gross rate for a basic rate taxpayer would have to be 6.25% and for a higher rate tax payer, 8.33%.
Just like a normal savings account, there are a variety of cash ISAs available such as instant access, notice accounts and fixed term rates. Broadly speaking, the longer you are able to leave the money on deposit, the higher the likely rate of interest you will receive.
Stocks and Shares ISA’s - allows you to hold any authorised unit or investment trust, open-ended investment company (OEIC) or any share quoted on an exchange recognised by the Inland Revenue.
There are no geographic restrictions, so you could, for example, invest all of your allowance in a fund invested in Chinese shares.
You can also hold gilts, corporate bonds and loan stocks as long as they have at least five years before maturity and permanent interest bearing shares (PIBS).
Can I withdraw money from my Cash ISA?
You can make withdrawals from most Cash ISAs (depending on the account terms), though many fixed term Cash ISAs do not allow withdrawals until their term has finished.
You need to remember that once you have taken your money out of a Cash ISA, you cannot replace it within the current tax year.
Do I have to stay with my bank?
No, you can switch provider. But don’t do it by withdrawing your money and taking it to another bank – you’ll lose your ISA limit and tax-free benefits. Instead, banks can transfer your ISA over to another provider for you.
You’ll need to fill in a form and your money will be moved to a new provider for you, to protect your tax-free benefits and any remaining ISA limit, if you move part way through a tax year.