ISAs - INDIVIDUAL SAVING ACCOUNTS

What is an ISA?

ISA stands for Individual Savings Account and is a type of savings account which was introduced by the Government in the late 1990s. An ISA is not actually a product but a way of putting a portion of your money into a tax free investment system. Every adult in the UK may place a certain amount of money into an ISA in any one tax year (April to April), the two main types are Investment (or Stocks and Shares) ISAs and Cash ISAs. It is possible to have both ISAs with one provider, or two separate providers. It is also possible to use your entire ISA allowance for an Investment ISA, or you can use the money for both types. You may not place the entire allowance amount into a Cash ISA.

Can anyone get an ISA?

In order to obtain a Cash ISA you must be over 16 years old and for an Investment ISA you must be aged 18 or over. You must be a full UK resident (and accordingly, be under UK tax law) and in general you must also live in the UK. There are some variations to this rule: people who work overseas but are paid by the UK Government (such as diplomats, members of the armed forces or Crown employees) and their spouses/civil partners may open an ISA.

What is an Investment or Stocks and Shares ISA?

An Investment ISA (sometimes referred to as a Stocks and Shares ISA) allows you to invest in long-term investments – such as bonds, pooled investments or individual shares. There are two limits according to age group for an investment ISA (although this is set to change, see note below), and they are:

What is a Cash ISA?

A Cash ISA is not dissimilar to a savings account provided by a bank or building society, but there is one main difference: the interest paid in a Cash ISA is paid gross of tax instead of net of tax. This gives you a higher return. Each tax year (April 6th to April 5th), an investor is allowed to put a sum of money into a Cash ISA. Once the investor has filled a Cash ISA with that amount, he or she is not permitted to add any more.

Where can I Apply for an ISA?

ISA applications can be made through an ISA manager including banks, building societies, insurance companies, unit and investment trust companies, stockbrokers, National Savings and Investments, some supermarkets and retailers, financial advisers and fund supermarkets. Not every ISA manager will offer both Cash and Investment ISAs. For example, you cannot get a Cash ISA from a stockbroker. Your ISA manager will look after your account for you.

Investment ISAs are usually available from stockbrokers, unit and investment trust companies, insurance companies and financial advisers. To get the most out of your money, make sure you browse and shop around to find a suitable ISA manager. For example, some providers may offer to spread risk by setting up a regular contributions scheme. This allows you to spread costs and risk over the year.

Getting a Cash ISA

Cash ISAs are generally available at banks, building societies, the Post Office® and some supermarkets and retailers. Opening the account is simple, like opening a regular savings account. You will need the usual proof of age, identity and residence and you will need to agree to the rules and regulations regarding your ISA allowance. Whatever type of ISA you choose to open, make sure you check that the ISA manager is fully approved by HM Revenue & Customs. They will also need to be fully regulated by the Financial Services Authority (FSA).

Can I withdraw Money from my ISA?

Yes; and you won't lose the tax benefits you have already built up on the money. But there are some things to bear in mind: you may need to provide notice of your intention to withdraw money. You may also some interest if you withdraw 'early'. If you have an ISA life insurance policy, you may even be charged a penalty. If you have an Investment ISA you may not get all the money back which you placed in the account, especially in the early years of an investment. If you withdraw money from your ISA, any capital you put back in later the same tax year will be counted against your annual allowance.