The advantages of ISAs
Due to unseasonably low interest rates, now is probably not the most obvious time to consider opening a savings account, but if you shop around you will find several options that can offer you attractive rates as well as security when it comes to your money. One such option is an individual savings account, more commonly known as an ISA.
Individual Savings Accounts have become an attractive option for savers since they were introduced by the government in 1999. The biggest selling point for savers and investors is the fact that you can save without paying any tax on the interest you earn in that year. This means that anyone taking advantage of this type of deal in the years since they were introduced would have kept almost £100,000 safe from the Inland Revenue. This really singles out this form of saving from other options as, although you may be able to find rates of three or perhaps even four per cent with some long term savings schemes, you will be liable for tax on any interest you have acquired.
Different types of ISAsWhen considering a deal it is worth noting that there are two different types you can opt for; a simple cash arrangement or a stocks and shares policy. A cash account is very much like a regular savings option, often with a set interest rate, though you do not pay income tax on your savings or the interest accrued. Another option is to choose an investment option, also known as a stocks and shares ISA. With one of these, your savings and the interest you gain is linked to the performance of stocks and shares on the stock market, rather than a set interest rate over a period of months. Investing in a stocks and shares option offers the potential for greater returns, but as your money is effectively tied to the market, you run the risk of actually ending up with less than your initial investment if there is a downturn or sharp fall. Unlike cash ISAs, investment accounts are usually open-ended with no official maturity date. They are very much seen as a long term investment, perhaps around five years or longer. Often, your ISA provider will offer you a limited choice of the stocks and shares you can invest your savings in, or they will do this on your behalf.
What is the maximum amount you can save?Your annual allowance is £10,680 for the current tax year. Of this, up to the first £5,340 can be saved in a cash account with one provider - the remainder of your allowance can be saved in an investment deal. It is, however, entirely up to you how you choose to save. You may wish to put your full allowance into an investment scheme or split between the two.
When can you pay into an ISA?When you have opened an account it is entirely up to you how you go about saving. Some banks and savings companies will stipulate minimum payments or regular payments, but in theory you can pay in as much as you like up to the maximum limit. This means you can choose to invest the full amount in one lump sum or pay in a little at a time, when cash is available or even sign up to a regular direct payment. The flexibility of these accounts is another reason why so many choose to open one.
How many ISAs can you have?Any investor can invest in a maximum of two ISAs in any one tax year. This could be one cash account and one investment deal; either from the same provider or two different companies. You must not exceed this limit or have two of the same account types.
Where to find the perfect ISAAfter you have decided to open an ISA, either cash or stocks and shares, there are a huge amount of opportunities for you to invest your savings. Most banks and building societies offer a range of accounts and all have advisors who will be happy to talk to you about the best option for your needs. It is worth remembering, though, that they may not offer the best rates, so it could be in your interests to shop around. A reputable price comparison site will be able to show you the best ISAs on the market and the ones that will give you the best return on your savings.