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Guide to ISAs

Introduction

Anyone who has ever had any experience of buying a financial product will know that many of them involve a bizarre combination of the blindingly obvious and the unnecessarily over-engineered.

Individual Savings Accounts (ISAs) are a classic example of this. The brainchild of New Labour financial whiz kids in the late 1990s, they were first introduced in April 2000.

ISAs are, in essence, a tax-free “wrapper” into which it is possible to place a range of assets, including shares, insurance-type funds and cash.

Money invested in an ISA rolls up free of tax. Any income is free of tax. Payouts are also tax-free when some or all of an ISA is cashed in. The obvious aim of ISAs is to encourage people to save more for their needs, by offering them incentives to do so.

That’s the simple part. The complicated bit comes when looking at how ISAs are actually structured.

Investment timetable

As with many investments, investment in an ISA “runs” throughout a tax year, not a calendar one. So you can start investing in a new ISA on 6 April and keep on doing so until 5 April the following year.

Eligibility

You can invest in a cash ISA if you are at least 16 years of age and are resident in the UK (or 18 for share-based investments). The ISA will be in your name. You cannot hold an ISA jointly with a spouse. Each must be in one person’s name.

Investment period

There is no time limit on ISAs. You can keep your money in one for a year, 10 years or however long you want to. Although some ISAs require minimum investment periods, most do not and you can generally cash one in without penalty.

Investment limits

There are currently two types of ISA, a Mini and a Maxi.

A Maxi allows you to invest up to £7,200 each tax year in it, of which up to £3,000 (or less) can be in cash. The rest can be in shares, funds like unit trusts and bonds.

If you do not invest up to the maximum limit in cash or the insurance element, you can top up to the £7,200 level with share-type investment. But conversely, you cannot top up to the £7,200 limit with cash if you want to hold less share-type investments.

If you invest in a Maxi ISA, you must do so only through one provider or one manager of that “wrapper”.

A Mini ISA is different in that each tax year you have the same £7,200 allowance, but this time you can select two different managers for your money: cash or shares.

Again, you can place up to £3,600 in cash and up to £3,000 in share-type products.

Unlike a Maxi, however, if you under-invest in ANY of the other elements of a Mini, you cannot then top up one of the other two elements.

Although you can switch your money around within each pot, moving from one mini-cash ISA provider to another if the first one’s interest rate is not good, you cannot currently move from cash into shares or viceversa. And if you cash in some of your ISA, you cannot then top it up later on.

For both Maxi and Mini ISAs, you have the full 12 months to save up to your annual limit and you can do so either by means of a lump sum or regular contributions into an account.

Once those 12 months are up, you cannot make use of a previous year’s under-investment to add a bit more this year. Use it or lose it, in other words.

More pages

Page 1: Introduction
Page 2: Recent reforms

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