An Individual Savings Account (ISA) is a type of account which the UK government allows you to save and/or invest a certain amount of money each year. The key factor of why it should be an important part of your investment portfolio, is that any money you make is not subject to tax.
By using the annual allowance (currently £20,000) you can build up a substantial pot, year-by-year, which is highly tax efficient. It is more flexible than a pension, in that you can withdraw your savings at any time/age. However, once withdrawn, you have lost that deposit allowance. So, for example, if you save £20,000 for two years, to give you a pot of £40,000, then withdraw that £40,000, it is not possible to put £40,000 back into the ISA in one lump sum. You can only use your future annual deposit allowances, to add to the ISA again.
It’s now possible to open an ISA account with a wide variety of financial organisations, including high street banks and specialist stockbroking firms. The internet is fast becoming a major supplier of ISA related services. For example, you can open an ISA and select an investment portfolio online, using ‘robo-advisors’. This is an automated system which provides basic guidance as to which portfolios would be suitable for your risk appetite. Many people still prefer dealing face-to-face with a financial advisor, but the internet can offer cost-effective options for those who feel comfortable with managing their own finances.
There are limits to investing in ISAs each tax year, from 6 April to the following 5th April.
- The limit is per total ISA investment that year, not per account. So it is possible to have more than one account in a year, but with combined deposits not exceeding the allowance.
- The limit applies to the cash paid into the account, not any investment growth that may occur during the course of the year.
|Tax Year||Adult Limit (per annum)||Junior Limit (per annum)||Lifetime ISA limit (per annum)|
Types of ISA
An ISA containing cash only, similar to a savings account, but with the tax advantages of an ISA. Most cash in ISA’s is entitled to the £75,000 deposit guarentee provided by the Financial Services Compensation Scheme.
The ‘cash only’ ISA has been replaced by the NISA, see below.
Stocks and Shares ISA
An ISA that has the same tax advantages, but was used to purchase ‘qualifying investments’, such as Trusts, OEICS, Share, Bonds, Commodities etc.
This type of ISA has now been replaced with the NISA, see below
In 2014 there was a New ISA (NISA), which combined the cash and stocks & shares ISA into one. So now instead of having different annual limits for each type of ISA, you can now have any combination of cash or stocks & shares in your ISA.
Currently this allows you to place up to £20,000 into an NISA in any form of cash, or investment (within the qualifying rules).
This has greatly simplified the ISA system.
Why invest in an ISA ?
To achieve a real return on your money, above and beyond inflation, it is necessary to :
- Invest in something that has the potential to outperform inflation in the long term e.g. stocks and shares
- Minimise costs i.e. pay as little fess as possible
- Maximise tax efficiency i.e. pay as little tax as possible
It is possible to achieve all three with an ISA, if you invest well and find the best ISA’s in the market. It is often the case that the best deals are not on the high street, and to find the lowest cost and highest flexibility, it is necessary to look for specialist firms.
Below is a list of some excellent ISA products, at the time of writing.
Good ISA deals
Below is a list of some good investment ISA’s in the market at present. There is a huge variety and choice, so it is important to do your own research and due diligence, and preferably seek independent financial advice, before making any decisions.
There are many online sites that provide a list of the interest rates of all the current cash ISA’s, with both fixed and variable rates.
The list does not cover cash ISA’s as interest rates are low at present, and to get the best inflation-beating returns, some type of investment is a good idea.
|Cavendish online||DIY online platform, 12 portfolios according to your chosen risk level||No charges for buying selling funds, low platform charges|
|A J Bell||One of the largest fund providers for ISA’s and Pensions. Wide variety of funds for DIY investor||Low platform fees, £1.50 for buying and selling funds|
|Nutmeg||Robo-advisor style investment. Offers fully managed portfolio’s. All done online||No platform fees for first 9 months.|
|Evestor||Online advice available (for a fee). Detailed questionnaire guides you to appropriate funds||Some of the lowest fees around.|