What Is An ISA?

An ISA is a financial product which is also known as an individual savings account. It is specifically designed for residents of the United Kingdom to help them to save or invest as it gives good interest rates. Investors can benefit from having tax free savings.

In April 1999, ISA’s were introduced to replace earlier financial products such as PEPs (personal equity plans) and TESSAs (tax-exempt special savings accounts). The reason for the introduction of the ISA was so that a wider range of people would find them attractive. Previous savings plans were seen to be specifically designed for the middle class alone.

Types of ISA

An investor now can choose between a cash ISA or a stocks and shares ISA. It is up to the individual which type of ISA he wishes to invest his capital in. But there are limits to the amount of capital which can be invested. Rules from the Inland Revenue state that an investor can invest up to £10,200 into an account which is tax free. This means that an investor can choose to halve this amount between the two types of ISA putting £5,100 into a stocks and shares ISA and £5,100 into a cash ISA. At the moment the maximum amount for under 50s is £7,200 in one account but this is set to change from 6th April 2010, when it will be possible to invest the full £10,200 into a stocks and shares ISA.

It is important to understand the types of ISA products which are available before you decide to invest in one. Knowing how to choose the best one and knowing a bit about the different types will help you in your decision. But one thing is for sure, an ISA is a great way to make the most of your savings as you will normally get a good return on your money and the fact that they are tax free makes all the difference.

It is worthwhile having a look around at the different ISAs on offer from various financial institutions. You do not have to accept the one on offer from the bank that you normally deal with. You may get better cash ISA rates elsewhere. A lot of the time it will be worth looking online as the online sections of various institutions will give better rates. But do not think that this is always true as sometimes you may get better cash ISA rates from your local branch. The trick is to make sure that you have a good look around before deciding on the ISA you are going to invest your money in.

Cash ISA

If you have decided that you want to invest in a cash ISA, then you will need to make sure that you are fully aware of the product you are investing in. It has been known for some financial institutions to offer great rates for a certain period only. If you do not read the small print then you may be unaware that after a certain period of time, that your cash ISA rates will drop quite significantly. This is not a disaster though, as you can always switch to another ISA provider when the bonus period is up. But many people may not have the inclination or the time to do this.

Check out the terms and conditions fully as you may be better off, choosing an ISA provider that has less attractive rates initially but will keep these rates for you. That way, you might get more for your money over a longer period. It is always a good idea to keep an eye on the ISA you have chosen and other ISAs on offer. That is because your ISA may not always be as competitive as others which are being offered at that time. If you notice that your ISA is not performing as competitively as others, you may want to have a look around to see what else is on offer and check out whether or not you can switch to another provider with minimum fuss. This will not be a difficult task if you have not agreed to a certain fixed period. However if you have signed up to stay with one provider for an agreed amount of time, it will not be so straightforward to switch and you could incur charges.

Which Type of Cash ISA Is Best?

You may have decided upon a cash ISA and now you will be faced with the decision on whether to choose a fixed rate or a variable rate. If you are saving money but want to be able to withdraw it at any time, then a variable cash ISA is the best option. This would suit those who are not saving for any specific purpose and who may need to withdraw money at any given time in order to pay for unexpected things. When interest rates are rising, this is the best possible ISA to have as the cash ISA rates will raise too. There is no penalty for withdrawing from this fund at any time.

But if, on the other hand, you are saving for a specific purpose and do not want to be able to withdraw from your ISA whenever you want, then a fixed rate ISA is the one for you. This type of ISA allows you to have a fixed rate of interest for a specific period of time. A fixed rate ISA will give the investor a definite amount of income after a certain period. The only drawback with this type of ISA, is the fact that you will be penalised if you try to withdraw money before the end of the term and you will also be charged if you want to switch to another provider.

Stocks and Shares ISA

But what if you would prefer to invest in a stocks and shares ISA instead? Stocks and shares ISAs allow you to invest more money and have the potential to make you much more money than you would make with a cash ISA. However this all depends on the type of stocks and shares ISA that you invest in and you must be prepared to leave your money there for a number of years. That way you will get more for your money. Stocks and shares ISAs are better if you are looking to make some money for the future.

But what exactly is a stocks and shares ISA? Basically it is a financial product which enables the saver or investor to use the stock market to make money which will be free from tax. They are available to all United Kingdom residents who are over the age of sixteen. But it is important to note that the ISA is not actually an investment but rather a ‘wrapper’ which will keep your savings protected from tax payments. It is called a ‘wrapper’ because it is protecting the money you make from being subject to capital gains tax.

The reason why stocks and shares ISAs are preferable to cash ISAs for some people is the fact that you can save or invest more money in them. The government has announced that the entire amount that you can save tax free in one year can now be put into one stocks and shares ISA. Which is great news for many investors as it means that they will be able to save more money here at better rates. It is well known that shares are a better investment than cash over a long term.

Is It A Good Idea To Open An ISA?

An Isa is a great way to save your money so it is definitely worthwhile opening one up. A cash ISA is probably a better choice for those wishing to save short term. But if you are planning to save long term, then you would really benefit from a stocks and shares ISA. One good reason for opening up an ISA would be to create a retirement fund especially as stocks and shares have been known to go up significantly over a longer period. The main reason why the government introduced ISAs in the first place was to encourage people to save towards old age. That is why they will allow you to save more money in a stocks and shares ISA which is considered to be a long term way of saving and it is why those over 50 are allowed to invest more in their ISAs.

Which One Should I Choose

If you have never had an ISA, you might be confused about which is the best one to choose. It is easy enough to decide between a cash ISA and a stocks and shares ISA but knowing which type of stocks and shares one to choose can be a bit more difficult. You can’t really tell how well this investment is going to do so you cannot really know which the best one is. But in saying that, there are a number of investments which typically do better than others and which are considered to be a good investment for your money. These are managed funds, index-tracking funds, exchange-traded funds and individual shares.

Managed Funds

The term managed funds, refers to funds that are actually managed by people rather than by computers. This type of investment can often do well but most of the time they don’t. And it will cost you quite a bit of money to have someone look after your money or in actual fact ‘to lose your money’. However around 15% of managed funds are managed really well and can actually make you quite a bit of money. You just have to find a really good fund manager. Try looking for companies that have a reputation as good fund managers in order to make the most from this type of investment. There are online checkers which can help you to compare these fund managers before you make your decision. The annual fees will play a big role in helping you to decide which one to choose; the lower the fee the better for you. The only reason you should choose a fund manager with high fees is if they have a really good track record. But it is important to remember that just because a fund manager has performed well in the past, it does not mean that this is a guarantee that your funds will provide a good return. There can never be any guarantees when it comes to the stock market.

Index-tracking Funds

These are probably the easiest and most straightforward ISAs to choose. They are cheap, simple and effective. The way they work is by splitting your money into small chunks, which are invested into all the companies that you are tracking in the index. Whichever part of the FTSE you are tracking, some money will be invested in each of the companies in that area. You can even choose to track some of the foreign stocks instead. Your funds are managed by a computer and that is why they are so cheap. As with managed funds, it is a good idea to choose one with a lower charge. This is because the lower the charge, the more money you will make. If you have a lower charge, you will be getting more money into your pocket as less money will be deducted from your fund at the end of every year.

Exchange-traded funds

Just like index-tracking funds, exchange-traded funds are quite cheap and they work. They are easy to purchase and the charges associated with them are quite low. Although they work in a similar way to index-tracking funds, it is necessary to use a broker in order to buy one.

Individual Shares

You can also choose to invest in individual shares but it will be necessary for you to have some knowledge of the stock market. You cannot just choose a company to invest in without having some knowledge of how stocks and shares work or you will more than likely lose your money.