What is an ISA?
An ISA or Individual Savings Account is a financial product specific to the UK. ISAs were introduced in 1999 to offer UK residents a way to save and grow their savings in a tax exempt manner. The ISAs replaced the previous Personal Equity Plans (PEPs).
What makes ISAs special is that any money contributed can grow free of capital gains tax. It is considered a savings and investment instrument, but is technically not a pension. Consumers have the option to keep their money in an ISA in cash or invest in financial instruments, such as shares, up to an annual limit. Today, there are over 15.4 million ISA accounts, with 78 per cent of these being cash only.
ISAs are available in two formats: cash and stocks/shares. Savers can open one of each ISA and contribute to both on an annual basis, up to the government set limit. The cash ISA is a good option for those savings for a specific purchase or for short-term savers, as the money can is fairly easily withdrawn. The stocks/shares ISA should be seen as a more long-term savings plan because money invested in the shares of listed companies is not readily accessible as cash.
Are there limits to how much I can contribute to an ISA?
Because ISAs benefit from preferential tax treatment, there are limits to how much can be contributed to an ISA on an annual basis. These limits change from year to year, so it is important to check first what the annual limit is before contributing to an ISA account. There are limits for both cash contributions and shares. For example, for 2011-2012 , the cash limit is £5,340 and share limit £10,680.
In 2011, the UK government launched the Junior ISA account. The Junior ISA accounts, aimed at children under the age of 18, have an annual limit of £3,600. However, children will not have access to the account until they are 18. Once they reach that age, they can withdraw from the Junior ISA account or convert it into a standard ISA. It is important to note that children are only eligible to open a Junior ISA account if they do not have a Child Trust Fund account.
Where can I open an ISA?
ISA accounts can be opened at any official ISA manager. A full list of ISA managers can be found on the Financial Services Authority (FSA) website: www.fsa.gov.uk. Basically, ISAs are available from a range of financial institutions, including banks, stock brokers and building societies. There are now also retailers that offer ISAs.
ISA managers should offer a range of accounts, although not all will offer both cash and stock/shares ISAs. This means that you should shop around to find the manager that best suits your needs and the ISA you are looking for.