Individual Savings Account (ISA / NISA) are a way of saving and investing without paying any tax on the returns you make.
ISAs were launched in the UK in 1999 to encourage people to save. They allow you to earn interest on your savings without paying tax on it, and to invest in stocks and shares without being liable for tax on any returns you make.
ISAs were introduced to replace Personal Equity Plans (PEPs). Initially savers had the option of a mini ISA, which allowed investments in either cash or stocks and shares, or a maxi ISA, which combined both elements in one account. The two current types of ISA - cash ISAs and stocks and shares ISAs - replaced the mini and maxi ISAs in 2008.
For UK residents, ISAs are an excellent way of saving - in fact, they should be your first savings port of call in order to avoid paying tax unnecessarily on your investments.
Benefits of ISAs
The primary benefit of ISAs is the tax advantage that allows individuals to profit from savings or shares without paying income or capital gains tax on that return.
The secondary benefit is that you are saving some of your income. Whether you've a particular savings goal in mind or you just want to ensure you've got an emergency fund tucked away, an ISA can provide a simple way to help achieve this.
Types of ISAs
ISAs are available in two main types; within each type of ISA you can choose from a range of products to create a savings portfolio tailored to meet your needs. The two types of ISAs are:
- Cash ISAs, which work like a regular savings account and feature the added benefit of tax-free interest.
- Stocks and shares ISAs, which allow you to invest in funds, structured investments, or in the stock market. This extra risk can make for a potentially higher return.
Within the two types of ISA there are a range of options to choose from. For example, cash ISA providers, such as banks and building societies, may offer both instant access and fixed-rate cash ISAs. This allows savers to select the product that best fits their requirements.
Stocks and shares ISAs can be invested into many different types of funds, structured investments, and directly into shares. This allows you to choose where you want to invest and how much risk you want to take with your money.
Choosing an ISA provider
ISA providers are known as ISA managers. They can include banks, building societies, fund managers, stockbrokers, and financial advisers. ISA managers must be authorised by the Financial Conduct Authority (FCA) and approved by HM Revenue and Customs.
While the approved status of an ISA manager does not guarantee the quality of ISA manager's performance, or that an ISA investment will deliver a satisfactory return, it does provide access to regulatory procedures if things go wrong. This includes the FCA complaints procedure, the Financial Ombudsman Scheme and the Financial Services Compensation Scheme, if applicable.
Making contributions and withdrawals
Because of the tax advantages of ISAs, there are rules governing contributions and withdrawals. Contributions are subject to annual limits. For the current tax year the annual limit is £15,240, part or all of which can be saved in a cash ISA.
For example, if you save £7,620 in a cash ISA, you will be left with another £7,620 to invest in a stocks and shares ISA. Alternatively, you can place the full allowance of £15,240 in a stocks and shares ISA or in a cash ISA.
Withdrawals may be permitted depending on the type of ISA you opt for. If you have invested your full allowance during the tax year and then withdraw some of the cash, you will not be able to contribute any more to your ISA during that tax year.
Transferring an ISA
You can usually transfer any money held in ISAs from previous tax years into a new ISA, even if this amount is greater than the annual allowance. They should be transferred properly, via your existing ISA manager, in order to avoid losing their tax-free status.
You can transfer funds from a cash ISA to a stocks and shares ISA, but not the other way round. So, if you have a stocks and shares ISAs that you wish to transfer, your only option is to transfer your cash to another stocks and shares ISA.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED
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