Individual Savings Accounts (ISAs) are an excellent vehicle to consider as a destination for your hard earned money. Why? Well, the main bonus is because ISAs carry the benefit of an annual tax efficient allowance,

This guide will explore the ins and outs of ISAs, and will help you to decide whether they’re the right place to grow your nest egg.

Your Annual ISA Allowance

ISAs are one of the few tax efficient ways to save for your future. Each year, savers can ‘use’ a tax-efficient allowance for the 2011/2012 tax year. Thanks to Alistair Darling, ISAs are now indexed inline with inflation.

There are two types of adult ISAs to choose from: cash or stocks and shares. You are permitted by the government to open and invest in one cash ISA and one stocks and shares ISA per tax year, although you can use one or more provider for each account.

Each type of ISA carries their own specific allowance and rules; as a result, they both offer unique and important benefits.

Cash ISAs

Similar to a normal savings account, cash ISAs have the added advantage of allowing you a tax-efficient allowance of up to £5,340 per year.

There are two main types of cash ISAs – fixed term (this affects when and how easily you can withdraw your funds) and fixed rate (relating to interest and the amounts you pay in).

Stocks and Shares ISAs

Stocks and shares ISAs allow you to potentially grow your money further by investing it in the stock market. The returns from your investments will also be free of UK capital gains tax.

Be aware that these ISAs carry a higher risk factor than their cash counterparts, since the stock market is naturally subject to rises and falls. Different funds carry different degrees of risk, so it’s important to clarify your comfort level before you plunge ahead.

To learn more about ISA basics, have a look at the easy video on the subject at Moneysupermarket.com.

Moving Your Money About

Any money you save from a previous tax year can be transferred wholly or partially from your cash ISA to a stocks and shares ISA without affecting your annual allowance.

If you have saved money in the current tax year from a cash ISA, you can transfer it to a stocks and shares ISA, providing you transfer the whole amount saved up to the date of the transfer. These savings are viewed as having been invested in the stocks and shares ISA for the current tax year.

Capital Gains Tax

If you earn more than £10,600 from the sale of shares or other assets in a single tax year, you would usually have to pay Capital Gains tax. The good news is that as mentioned above, with an ISA you will be exempt from this.

Be aware however that any losses on ISA investments cannot be used to reduce the Capital Gains tax on your earnings from investments outside an ISA.

ISA Eligibility Criteria

To qualify for an ISA you must be:

• A UK resident or Crown employee or the husband/ wife/ civil partner of a Crown employee.
• A member of the armed forces who may be working overseas but is paid by the government.
• An individual of 16 years or over for a cash ISA
• An individual of 18 years or over for a stocks and shares ISA

 

As from November 2011, children under 18 are permitted to open a junior ISA (JISA) so that they too can take advantage of the excellent benefits that ISAs offer. Remember, the eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.

Conclusion

With the annual ISA allowance that the government permits as a tax break, these types of savings vehicles can stretch your money much further than traditional savings accounts. While cash ISAs are a safe bet, if you want to grow your money to the point where it can even sustain you consistently in your retirement years, savvy management of a stocks and shares ISA portfolio will offer you a significant return on your investments.

If you’re new to ISAs, be sure to research your options with different providers, or you could consider the services of an independent financial advisor who has the expertise to advise you on the best ISA deals to match your circumstances. Also, do remember, the value of investments can go down as well as up and you may get back less than you invested.