Simple, flexible, tax-free: a beginner's guide to ISAs
Sunday 21 January 2001
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; request a free guide on NISAs from Hargreaves Lansdown
- 1 Al Pacino on suffering from depression: 'It can last and it's terrifying'
- 2 Half of young women unable to ‘locate vagina’ and 65% find it difficult to say the word
- 3 Saudis risk new Muslim division with proposal to move Mohamed’s tomb
- 4 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 5 Mexican woman becomes world’s 'oldest person' at 127
Rotherham child sex abuse scandal: Labour Home Office to be probed over what Tony Blair's government knew - and when
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Ashya King: Parents of five-year-old boy refused permission to visit him in hospital and denied bail at Spanish court
With Douglas Carswell joining Ukip, my party has taken another giant step forward
When elitism grips the top of British society to this extent, there is only one answer: abolish private schools
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
iJobs Money & Business
£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...
£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony