ISA's

For several decades the UK government has been attempting to encourage individuals to save money as a way of helping to secure their own financial futures. As well as through various public information programs, the main form of encouragement has been the establishment of tax-free savings vehicles.

In April 1999, the Individual Savings Account, or ISA, was established in the UK. This product was designed by the government, and replaced the PEP and TESSA (although those with money already invested in these plans could continue their investment). The ISA is a tax-free savings product, the aim of which was to make tax-efficient saving accessible to everybody.

Mini and Maxi

There are two types of ISA, the mini (sometimes known as a cash ISA) and the maxi. No investor is allowed to put money into a mini and maxi ISA during the same tax year. The differences between these two types of savings account is the make-up of the permitted investment, often referred to as the ’components’. In a mini ISA, the individual is permitted to invest £3,000 worth of cash, and stocks and shares up to the value of £4,000. In a maxi ISA the component make-up is different, allowing the individual to invest £3,000 in cash and £7,000 worth of stocks and shares, but only up to a total value of £7,000.

The cash component of an ISA can be thought of in much the same way as any other savings account; you simply deposit the amount of money that you wish to save. The majority of individuals who invest in ISAs do so solely using the cash component. The stocks and shares component is slightly more complicated; the range of ’qualifying investments’ in which this money can be placed is wide, including any stock market investment, as well as government bonds, property and other ’cash awaiting investment’. This allows the investor the potential to accrue well above the equivalent income had they simply invested their money in the cash component, but also opens the possibility of high-risk investments like stocks and shares actually losing money.

Tax Free

The great selling point of the ISA is, of course, their tax-free status. No income from the cash component is subject to any form of taxation, and the only portion of the stocks and shares component on which duties will be levied is ‘cash awaiting investment’, which is subject to a 20% flat fee. However, very few people have investments like this. Furthermore, cash ISAs are generally instant access, meaning that you will be able to get to your cash in a minimum amount of time if you found that you needed it.

If you are interested in an ISA then the range of options can be staggering, with many high-street banks offering significantly different packages. In 1999 the CAT Standard was established, offering consumers a way of judging a prospective ISA provider. Standing for Charges, Access and Terms, the Standard ensures that its adherents comply with a basic set of terms covering each of those three areas. The vast majority of ISA products comply with this standard, however, and so you may well need to investigate individual deals more closely in order to ensure that you are getting the best package.