What is an ISA?

With the Government keen to help people who aren't saving to get started and help those who are saving to save more, the new Individual Savings Account (ISA) was launched on the 6th April 1999.

Many people started to look to ISA's as a way of making the most of their tax-free allowances. Designed to be simple, flexible, tax-free savings plans, ISA's are to run for at least 10 years, with a Government review after 6 years. This is the first time that a government has guaranteed the continuance of any tax-free product for such a period.

ISA's enjoy major tax advantages, but the level of investment is restricted (see below). Both capital profits and income receipts are totally free from any liability to tax within the fund.

There are three basic types of ISA: Maxi, Mini and TESSA-Only. The three types of investment that may be contained within a Maxi or Mini-ISA are:

An ISA is a tax efficient savings plan, which can be made up of

Cash
Stocks and Shares
Life Assurance

How much can I contribute?

The value of your investment may go down as well as up, past performance is not necessarily a guide to future performance.

An ISA can contain up to 2 different types of investment: cash (including national savings plans) and stocks and shares.

ISAs tend to be a very popular savings vehicle as contributions grow tax efficiently. ISAs are also very flexible and allow lump sum as well as regular fixed contributions. ISAs are open to anyone over 18, resident and ordinarily resident in the UK. 16 –17 year olds can have a cash ISA

Mini & Maxi ISA allowances - New ISA simplification.

In order to simplify the ISA Structure, the distinction between Mini & Maxi ISA's has disappeared. Nowadays there's only be a distinction between Cash ISAs and Stocks & Shares ISAs.
ISA Allowances.

From 6th April 2008, ISA Investment limits were increased. The limit for a cash ISA is currently £3600, the Stocks & Shares ISA is £7200 and the overall allowance is £7200.

From October 2009, ISA limits will increase for people aged 50 to £10200, up to £5100 of which can be saved in cash. From 6 April 2010 everyone can benefit from the new ISA limits. The tax year runs from April 6th to April 5th and it is important to use as much of your annual allowance as you can within that time as it cannot be carried over into the next financial year.

Current ISA Allowances (2009/2010)
Cash ISA Allowance	£3600
Stocks & Shares ISA Allowance	£7200
Overall ISA Allowance	£7200

New ISA Allowances (2010/2011)
Cash ISA Allowance	£5100
Stocks & Shares ISA Allowance	£10200
Overall ISA Allowance	£10200

Transfer between ISAs

It is now possible to transfer money held in a Cash ISA to Stocks & Shares ISAs without affecting your annual allowance or the tax status of the investment.

From April 2008 PEPs ceased to exist and any remaining PEP investments will have been transferred to Stocks & Shares ISAs. The investments within the PEP will stay the same in the ISA and will retain their tax status.

Maxi and mini ISA's

Some ISA providers will promote schemes where the investment is limited to cash, or life assurance, stocks and shares. Such schemes are termed a "Mini ISA".
Schemes where the investment is in stocks and shares, with or without cash component, are termed "Maxi ISA."

Are ISA's transferable?

Yes, in the first year ISA's must be transferred to a similar product. For example, a life assurance-based ISA must be transferred to another assurance-based Mini ISA. Later investments will be fully transferable between providers.

Can I move money between the cash component and the investment component?

That depends upon the type of scheme you have subscribed to. If you have a Maxi ISA then you are unable to transfer money between the cash component and the investment component (life assurance, stocks and shares) or vice versa. If you have a Mini ISA then you are able to move your entire sum from a cash-based ISA to an investment ISA and vice versa, though there is a charge of 20% from any interest earned on an investment-based ISA.

What is the CAT mark?

This is a mark awarded by the government to ISA's that meet the government standards and is available with low charges, easy Access and fair Terms. The CAT mark may become a very useful standard to judge the merits of ISA's and their products.

How do I make my ISA work best for me?

Decide what you want, and why you want an ISA.

Security or nest egg.
Saving for a holiday or a new car.
Saving for retirement or a child's education.
To pay off the mortgage early.

Then decide how much you want to invest and whether you would prefer to invest a lump sum or by monthly payments.

What about the risks?

After deciding why you want an ISA, you must then decide how much risk you wish to take and how to spread the risk.

A cautious investor might concentrate the majority of their investment (70%) on low risk schemes such as cash and with profit schemes, with a smaller investment spread in profitable medium risk shares, such as Oil companies, Banks and large retailers.

A higher risk investor may wish to boost growth by injecting a small proportion of the investment in penny shares and other high-risk ventures. You must be prepared to lose part or all of this investment should the shares collapse.

When buying shares it is essential that you balance high risk against low risk and spread the risk as wide as possible.

What are the savings terms and purpose?

Depending on what you want the savings for, and when you want the savings, depends on the type of investment, which is the most suitable for you.
Short term saving:

If you are saving for the short term (up to 2 years) for a holiday, a deposit for a house or a new car, then the cash element is the most suitable form of investment, as you cannot lose money and you are saving the tax you would normally lose on you interest.
Medium term saving:

If you are saving for the medium term (2 to 7 years) then you must decide how important it is that you reach the target amount you want to save.

If you are saving for something where you require a fixed sum of money on a fixed date, for example tuition fees for a private school when your child reaches the age of 12, then it is essential that your investment is secure so that you can budget for that date.

If you are saving for something where the sum or date is more flexible, it may be prudent to invest some of the money in the stock market to take advantage of higher growth in shares over this term. If, at the end of your savings period, there is a shortfall in your investment due to a market crash, it must be possible to wait until the shortfall is made up, or buy a cheaper alternative.
Long term saving:

In the longer term, investment on the stock market will generally out-perform other forms of investment. Your investment will benefit from the underlying growth of the market, whilst short-term slumps and peaks will generally be ironed out over time. This will produce a higher rate of return compared to other forms of investment.

Where can ISA be obtained?

ISA's are available from a variety of sources all of which claim that their ISA is the best for you. In order to obtain impartial straightforward advice on the performance and the merits of each package and how this best suits you, it is important to obtain advice from an Independent financial Advisor, who can advise you based on your personal needs.

The value of your investment may go down as well as up, past performance is not necessarily a guide to future performance.

The information on this site is for general guidance only. Foyle Financial is an appointed representative of the M&E Network Limited, Network House, Lister Hill, Horsforth, Leeds, LS18 5AZ
Tel: 0113 259 1717, which is authorised and regulated by the Financial Services Authority. The M & E Network Ltd is entered on the FSA register (www.fsa.gov.uk/register/) under reference 150643.
The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.