The importance of putting some money away for a rainy day cannot be underestimated and one of the most popular ways of doing this is by opening an Individual Savings Account, or Isa.
Introduced over a decade ago in April 1999, they enable people to save as much as £11, 280 every tax year without paying any tax on the investment - something that is not the case with a regular savings account from a bank or building society. Isa account holders do not have to inform HM Revenue & Customs (HMRC) if and when they decide to withdraw money and the flexibility of the accounts makes them ideal for both those who want to do some short-term saving or put cash away for several years.
However, there is a myriad of options available to consumers, meaning some research will be required before deciding which account to pick.
Picking an Isa
Isas can be split into two main groups - cash Isas and investment Isas - both of which have their advantages and disadvantages. Cash Isas, as the name suggests, are used purely for paying money into and might be perfect for those who want to put a chunk of their monthly paycheque away to save up for a house, car or holiday.
They allow customers easy access to their money and holders will not have to pay any tax on interest generated by their cash while it is in the account, however one thing to note is that although a total of £11,280 can be paid into Isas every tax year, only half of this - £5,640 - can go into a cash Isa. Therefore, it is important that cash Isa holders keep track of how much they have put into their account. As HMRC notes, someone who opens an Isa with £3,500 but withdraws £3,000 of this a few weeks later will only be able to pay in a maximum of £2,140 before the next tax year begins on April 6th.
Numerous different types of cash Isas are on offer, each with different features. Those who want the convenience of being able to get at their money whenever they want might wish to pick an instant access product, however these are likely to have less favourable interest rates that come with accounts where you have to give notice before withdrawing any funds. It is also possible to open fixed-rate Isas, as well as ones that offer guarantees against changes in the base rate.
The alternative for those who do not think a cash Isa is best suited to their needs is to opt for the investment alternative, which can be used to hold stocks and shares. These are aimed at those who want to make a long-term investment and do not plan on touching the value of the investment for several years, but users do run the risk of the stocks and shares they hold in the Isa going down in value instead of up during the time period. However, if holders make shrewd investments, they could find they can generate healthy - and tax-free - returns over several years.
Of course, for some, a combination of a cash and investment Isa may be the perfect option. Laws governing Isas permit this, but holders will have to keep a close eye on what is being paid into each account. Customers are allowed to pay money into one cash Isa and one investment Isa every year, with as much as the full £10,680 limit able to be put into an investment Isa. For example, £11,280 can be put into an investment Isa and none into a cash product in each 12-month period and the ratio between the two can go all the way down to an equal split of £5,640 in each - however more than this figure cannot be paid into a cash product. Once the next tax year begins, it is possible to open one more of each type of Isa, however all payments going to existing accounts must stop once the new ones are set up.
Which one is right for you?
Deciding on what type of Isa to go for will be largely dependent on the individual customer's needs. Cash Isas may be preferable for those who have no interest in getting involved with stocks and shares and simply want to get more out of their money than they would if it was sitting in a standard bank account.
Investment Isas, on the other hand, have a bigger risk attached to them, but can offer generous rewards for individuals who have some knowledge of the stock market, or are part of a collective investment vehicle such as an investment trust that picks targets wisely.
Regardless of the product chosen, opening an Isa may be a wise move for anyone who has savings and wants to minimise the amount of tax they pay. And with the limits set to rise on April 6th in line with the Retail Prices Index, savers may soon have the chance to put even more money away for a rainy day.
Choosing an account
You can take a look at some of the more popular ISAs at Know Your Money by clicking here. Once you have chosen an account that seems right for you and the account has been opened, most Isa providers offer a cooling off period of as long as 14 days.
The good thing is that if you do decide to cancel the ISA and the the subscription has to be reversed within the agreed period, the amount paid in to open the Isa will not contribute towards the allocation for that tax year, so customers will be free to make the same deposit in another Isa, either with the same manager or an alternative provider.
To compare ISAs from the UK's leading providers click here.
Author: KYM Editor
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