An Introduction to ISAs

The one thing most of us probably already know about ISAs is that they’re tax free. This is indeed the case so if you’re interested in saving or investing money ISAs really are worth investigating.

OK, so here’s the basics; ISAs (or Individual Savings Accounts) were introduced in 1999 as a replacement for PEPs and Tessas, the idea being to encourage saving. Essentially they are a special type of savings and investment account that protect your cash and investments from the taxman. So, an ISA isn’t actually an investment in itself, rather, as the popular analogy usually goes, a protective wrapper for your savings or investments

Everyone over the age of 16 has an ISA entitlement of up to £7000 for any one tax year running from April 6th to April 5th, you can’t invest any more money in your ISA for that year once the tax year is over but that money will remain tax free for as long as it stays invested. Basically, if you want to save or invest money you may as well utilise your ISA allocation and improve your return.

Right, that’s the basics but there are a few complications to consider before you invest. Firstly you’ll need to decide what sort of ISA to go for: There are two main types – a Mini ISA and a Maxi ISA. You’re limited to just one Maxi ISA a year which allows you to bundle together a mixture of cash and stocks and shares. Because there’s a cap of £3000 a year in cash and Maxi ISAs are typically bought from investments companies who are unlikely to very competitive cash returns these are mostly favoured by investors in stocks and shares.

Mini ISAs on the other hand are perhaps a better option for cash returns. Again you’re limited to £3000 in a Cash ISA but whereas you can only have one Maxi ISA you can invest in two mini ISAs. This means you can split your investment between two companies - one Cash ISA and, if you like, a separate stocks and shares investment. Therefore you can find a competitive Cash ISA and still have the option of a tax free shares investment. Here’s a few leading Cash ISA’s to investigate:

The ING Direct ISA offers a market leading rate of 6.55% but drops to a variable 5.13% after six months. The Icesave Easy Access ISA in the other hand starts with a competitive rate of 6.10% and is guaranteed to beat the base rate by at least 0.3% until January 31st 2011 making it a good long term investment. You are required start with an investment of at least £1000 however.

The Alliance and Leicester ISA offers 5.65% AER (variable) including a 0.40% bonus payable to 31/01/09. There’s a minimum balance of £1 and you can transfer in existing ISA funds.