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; request a free guide on NISAs from Hargreaves Lansdown

The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
The Speaker of the House will takes his turn as guest editor of the Today programme
arts + ents

Watch the spoof Thanksgiving segment filmed for Live!
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
boxingAll British heavyweight clash gets underway on Saturday night
i100 Charity collates series of videos that show acts of kindness to animals
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game