What is an ISA?

What is an ISA?

An ISA or Individual Savings Account isn't an investment itself. It is a tax efficient "wrapper" in which you can place other investments.

Placing investments in an ISA "wrapper" means that any growth from an investment held within an ISA will not be liable for capital gains tax and any interest gained from either cash or bond holdings within an ISA will not be liable for income tax.

Who can have an ISA?

In general you have to be 18 or over and resident in the UK for tax purposes to qualify for an ISA allowance.

If you are 16 or 17 you qualify for the cash portion of the ISA allowance.

How much money can I put into an ISA?

The total amount that an individual can invest into an ISA in any tax year is currently £7200. This can be structured in numerous combinations, the limitation being that the amount of Cash ISA is not more than £3600.

For example, the following combinations are legitimate ones:

• £7200 in Stocks and Shares ISA
• £2000 in Cash ISA and the rest, £5200 (=£7200 - £2000), in Stocks and Shares ISA
• £3600 in Cash ISA and the rest, £3600, in Stock and Shares ISA

Clearly, one is not required to reach the £7200 limitation and can invest a smaller amount.

What types of investments can I make in an ISA?

An individual can use their ISA allowance to invest in some or all of the following.

Cash ISA

A Cash ISA operates just like a normal Bank or Building Society savings account apart from the fact that the interest paid on your deposit is paid gross of tax rather than net of tax, giving you a higher return.

An investor can save £3600 pounds in any tax year (a tax year runs from 6th April to 5th April the following year) into one of these accounts.

Once you have saved £3600 pounds into a Cash ISA in a tax year you cannot add any more to it even if you wish to top the account up following a withdrawal.

However if you have a Cash ISA with one provider and wish to switch to another (e.g. for a better interest rate or a better bank) some accounts allow transfers of money into them. These transfers do not count against your ISA allowance.

How do I open a Cash ISA?

Opening a Cash ISA is almost as straight forward as opening any normal savings account. For example you can speak with one of our wealth managers.

Most banks and building societies offer a variety of Cash ISA accounts either at their branches or on line. You can also open a Cash ISA with other financial service providers like the Post Office and some of the major supermarket chains (more on this in a later article in our ISA education series).

The usual proof of age and identity are required for opening these accounts plus usually a signed form stating that you understand and agree to the rules around the ISA limits.

What is a Stocks and Shares ISA?

You can use some or all of your annual ISA allowance to purchase individual shares or funds.

In its simplest form, a stocks and shares ISA, is just like any other share trading account. You set up an account with a stockbroker and give them your investment instructions, which they execute for a fee. (More on account fees in a later article in our ISA education series).

As well as buying individual shares, you can also include collective investments or funds in your stocks and shares ISA.

There are several reasons to look at buying funds as opposed to individual shares that will be examined in an article in a few weeks time.

In brief, funds can give you an exposure to a wider set of investments, such as corporate bonds, overseas equities, etc and they remove the tricky art of picking the right shares by giving you exposure to a range of shares suited to your investment requirements.

A comprehensive list of ISA funds

How can I open a Stocks and Shares ISA?

There are many stockbrokers that will let you set up an ISA account through which you can trade shares and funds.

You can also create an ISA account directly with a fund provider. (more to come on this in future ISA articles). However, you can only have one Stocks and Shares ISA per tax year.

Almost all of these brokers and fund providers allow you to set up a regular monthly contributions scheme so that you can spread the cost and risk of you investments over the year. We will look at the benefits and drawbacks to regular investing in a later article.

Jon Wild

http://www.morningstar.co.uk/uk/lc/article.aspx?lang=en-GB&articleid=77200&categoryid=240

 

This article originally appeared on morningstar.co.uk. All Rights Reserved. Please contact Morningstar for reprints