Simple, flexible, tax-free: a beginner's guide to ISAs

What is an ISA?

What is an ISA?

An individual savings account (ISA) works in a similar way to a regular bank or building society savings account - except that any returns you make are tax-free.

ISAs were introduced by the Government in April 1999 to replace personal equity plans (Peps) and tax-exempt special savings accounts (Tessas). They are designed to be more flexible than Peps and Tessas in order to encourage a greater number of people to save for their future. They avoid the drawbacks of both Peps - which were seen as being skewed in favour of those with a relatively large amount of money to invest - and Tessas, which imposed penalties on investors accessing their money in less than five years.

Who can buy an ISA?

Anyone who is over 18 years old and resident in the UK. From April this year, 16- and 17-year-olds can get in on the act, too, although the amount they can invest is limited to £3,000 in a mini cash ISA.

How much cash do I need?

Everyone over the age of 18 gets an annual ISA allowance of £7,000 each tax year. So this year's allowance needs to be invested before the end of the tax year - 5 April.

Theoretically you can start an ISA with £1, but most providers require a minimum investment of £500. You can pay into your ISA at regular intervals, drip-feeding your payments to avoid the risk of investing one lump sum when the stock market is at its highest. However, some people invest a lump sum - even as much as their £7,000 allowance.

Is it true that there are two types of ISA?

Yes, there's the mini and the maxi ISA. You can invest in one or the other in any one tax year, but you can't have both. If you do take out a mini and a maxi in the same tax year, you could be liable for a fine from the Inland Revenue.

So what's the difference?

Mini ISAs come in three forms - cash, insurance or stocks and shares. You can invest up to £3,000 in a mini cash ISA, a further £3,000 in stocks and shares and £1,000 in a mini insurance ISA. You can hold one, two or all three of these types of mini ISA in one tax year. They do not all have to be purchased from the same investment house.

What's the advantage of a mini cash ISA?

These ISAs have proved the most popular with the general public because they are the simplest to understand. They are also low risk because no money is invested on the stock market. Instead they operate more like a bank or building society account, the difference being that the returns are tax-free. In addition, your funds are easily available - not locked away for five years, as was the case with a Tessa. Your cash is available for withdrawal whenever you wish, although remember that if you have already invested your full £7,000 in mini ISAs, it cannot be replaced in the same tax year.

Why choose a maxi ISA?

The big advantage of a maxi is that you can invest up to £7,000 in stocks and shares. The stock market offers greater potential for higher returns than investing with a bank or building society, although of course, there is also a chance of bigger losses.

You don't have to invest the full allowance in equities, however. You can also include cash and insurance if you prefer, up to a limit of £3,000 for cash and £1,000 for insurance, investing the remaining £3,000 in equities.

You are allowed only one maxi ISA in any one tax year, and if you choose to split your investment into cash, insurance and stocks and shares, these components must be invested with the same fund manager, making the maxi ISA less flexible than the mini.

Can I carry any part of my allowance over to next year?

No. Your allowance for this tax year will be lost for ever on 5 April. After that, you are limited to next year's allowance (also £7,000).

Which ISA should I choose?

Many equity ISAs are UK-based so your money is invested on the London Stock Exchange. As the UK market is likely to be familiar to you already, it's a good place to start.

In the longer term, a more balanced portfolio will require investments in European and international funds.

Themed funds, such as those focusing on technology or health care, have attracted interest among investors. Bear in mind, however, that these tend to be much riskier than general funds, owing to the narrower investment range.

OK, I'll start an ISA before the end of this financial year. How do I go about finding the one that best suits my needs?

You really are spoilt for choice. If you aren't sure what you need, it might be worth consulting an independent financial adviser. Alternatively, if you're feeling more confident, you could do your own research using the national press and the internet. All investment houses have their own websites giving further information.

When you've made your choice and want to buy an ISA, it may be worth going through a discount broker to save on the initial charge (see page 10).

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

    Gaping hole at the heart of the European Union

    Treatment of Greece has shown up a lack of genuine legitimacy
    Number of young homeless in Britain 'more than three times the official figures'

    'Everything changed when I went to the hostel'

    Number of young homeless people in Britain is 'more than three times the official figures'
    Compton Cricket Club

    Compton Cricket Club

    Portraits of LA cricketers from notorious suburb to be displayed in London
    London now the global money-laundering centre for the drug trade, says crime expert

    Wlecome to London, drug money-laundering centre for the world

    'Mexico is its heart and London is its head'
    The Buddhist temple minutes from Centre Court that helps a winner keep on winning

    The Buddhist temple minutes from Centre Court

    It helps a winner keep on winning
    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'