Understanding ISA

ISAs are a popular type of savings account that is used by millions of people in the UK. However, if you have never had one before, you may not be entirely familiar with what ISAs are and what they do. Read on to find out more about understanding ISAs.

What are they?

‘ISA’ stands for individual savings account, and the aim of ISAs is to allow everyone to save a certain amount of money every year tax-free. This means that while you normally have to pay tax on the interest you earn on your savings with other types of savings account, this isn’t the case with an ISA.

What are the main types?

There are two main types of ISAs: the cash ISA and the investment ISA.

Cash ISAs allow you to save less than other types of ISA but all of the money you save in the account is guaranteed and you can access it whenever you need it, which makes these accounts very popular with a lot of people.

Investment ISAs commonly take the form of a stocks and shares ISA. This type of ISA allows you to save more money every year, which can be appealing for anyone looking to maximise their tax-free savings. Most shares ISAs are linked to the stock market – often carefully-selected FTSE 100 companies, but other high performing listed companies can also be chosen, such as those that have a good track record on the environment.

How much can you save?

There is an annual limit on ISAs, which changes every year so it is worth keeping an eye on this to make sure you are getting the most out of your ISA allowance. For the current tax year (2011/2012), you can save up to £5340 in a cash ISA.

For a share ISA, you can save up to £10680. There are two options related to investment ISAs in terms of how you save your money. One option is to save the total amount in the form of stocks and shares investments. Your other option is to save half in the form of shares and half as cash.

What are the risks?

It is important that you are aware that there are some risks attached to investment ISAs. This is because their performance is dependent on the market and so, while there is very good potential for you to receive very good dividends, your investment can also go down as well as up. However, if you look around for the best stocks and shares ISA, it should be well-managed and so risks should be kept to a minimum.

Also, it is advised that you plan to save in your stocks and shares ISA for the long term to give it the best possible chance of performing well. You could also consider a gilts and bonds ISA if you prefer, which has less of a risk attached but can still offer good returns.

Overall, make sure you do your research to make sure you choose the investment ISA you think would be best for your needs.