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More About ISAs 

Since their introduction on 6 April 1999, Individual Savings Accounts (ISAs) have become the UK’s number one way for consumerss to save and invest their money.  This is because ISAs are simple to understand and offer a very tax efficient way of saving and investing money.  By using an ISA you can save money in cash, which would typically be for the short term, or shares (equities), which would typically be for the long term.   

There are two types of ISAs: a ‘cash ISA’ or a ’stocks and shares ISA’ .  The current ISA rules are:

• The total annual investment allowance is currently £7,200.  Up to £3,600 of that allowance can be saved in cash with one provider.  The remainder can be invested in stocks and shares with either the same or a different provider.
• From 6 October 2009 the annual investment limit for consumers over 50 will rise to £10,200  – of that amount a maximum of £5,100 can be saved in cash.
• From 6 April 2010 the annual investment limit will rise to £10,200 for all consumers – again, of that amount a maximum of £5,100 can be saved in cash.
• You can invest in two separate ISAs each tax year – a cash ISA or a stocks and shares ISA.
• You can transfer money saved in a cash ISA to a stocks and shares ISA – but you can’t transfer funds the other way round.

If you have an existing cash ISA or stocks and shares ISA and are considering transferring its value into a new ISA, you should check with your existing ISA provider for any costs of transferring out – be aware that charges may apply if you transfer funds out of an existing stocks and shares ISA, or you could lose interest if you transfer funds out of an exisitng cash ISA.

It is important for you to understand that the relationship between investment risk and reward is closely linked.  For instance, the more risk you are prepared to accept, the greater the potential for investment returns.  While there are many different types of investment available in the UK, they generally fall under one of four types: cash, bonds, property and equities (shares).  Each type has its own benefits and risks.  

For instance, money held on deposit, such as in a bank or building society account, or a cash Individual Savings Account (ISA), is guaranteed to be returned to you.  However, the potential for investment returns on cash investments is limited to the interest payable on the money invested; this is the price you have to pay for having your original investment guaranteed.  When investing in cash there is the danger that in the long term the purchasing power of your money could reduce due to the effects of inflation.  This is something you should consider if it is your intention to invest money in cash over the long term, which is generally considered to be any period of time in excess of five years. 

At the other end of the scale, money invested in equities (shares) is much higher risk.  There is no guarantee that the money you invest in equities will be returned to you – you could lose the lot.  However, by accepting this significant degree of investment risk, you could potentially receive higher investment returns on your money, especially in the long term (any period in excess of five years).  You should ask yourself how much investment risk you are prepared to accept and whether you are willing, or able, to accept any risk that you could lose your money.