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ISAs explained

What is an ISA and what are the benefits?

An ISA (Individual Savings Account) is simply a way of packaging some of the money you save or invest so that the earnings you receive are not taxed. With a Cash ISA you don't have to pay tax on the interest and with an Investment ISA you have no personal liability to income tax or capital gains tax. Currently, you can put up to £7,200 in ISAs each tax year, up to £3,600 of which can be held in a Cash ISA. And if you were born on or before 5 April 1960 you’ll be able to save even more as the government will be increasing your ISA limit to £10,200, up to £5,100 of which can be saved in cash.

The Tax year runs from 6th April to 5th April.

Cash ISAs are simple to open and in many ways no more complicated than a regular savings account. Despite this, over half of the population haven't opened an ISA (source: Scottish Widows Savings and Investment Report 2009) and most of those people even have savings elsewhere. If you are keeping your savings in a regular bank or building society account, you could be paying unnecessary tax on the interest.

Which ISA is right for me?

There are two types of ISA: a Cash ISA - which is a savings account where your money simply earns interest tax free; and an Investment ISA, where your money is invested in the stock market (free of any personal income tax or capital gains tax).

The value of the tax advantages of an ISA depends on your personal circumstances and tax rules can change.

When deciding on your choice of ISA, you should consider:

1. How much money you have to save or invest.
2. How long it will be before you need this money.
3. Whether you are willing to tolerate the risk associated with investing in the stock market in exchange for a possibly higher return.

There is no guaranteed rate of return when investing in an Investment ISA. The market can go down as well as up and you may get back less than you originally invested. Be honest about your risk tolerance.

Another thing to think about if you're considering a Cash ISA is whether to have one with a fixed or variable interest rate, easy access or notice account.

How many ISAs can I have?

You can only put money into one Cash ISA and one Investment ISA each tax year, but there are no limits on the number of different ISAs you can hold over time.

Can I transfer my ISA?

ISA investors are able to transfer their Cash or Investment ISA between different providers. In addition, ISA investors can move funds from Cash ISAs into Investment ISAs without affecting their annual ISA allowance for the tax year. This flexibility is great, but remember, different risks apply to Investment ISAs and you are not able to move funds from a Investment ISA into a Cash ISA.

Top tips: how to make the most of your ISA

• Think about whether you've got money tucked away in current accounts or other savings accounts that you could put into an ISA to obtain the current ISA tax advantages.
• Start your ISA saving early so that you aren't rushing to get everything sorted out as the tax year-end looms.
• If you have a Cash ISA, make sure you understand the interest rate and how quickly you can take your money out without penalty. Is the interest rate fixed or variable or does it track the base rate? If it's fixed you can be sure of exactly how much interest you'll earn.
• Always try to contribute the maximum annual ISA allowance in every tax year so you can benefit from any tax advantages on the money you save or invest. Any unused ISA allowance cannot be carried forward to the next tax year.
• Be keenly aware of your risk tolerance and how quickly you want your money back when selecting the type of investment you'll make with the money in your Investment ISA. As a general rule, the sooner you want your money back, the less risk you may wish to take. Remember once the money is withdrawn, it cannot be replaced.
• If you have an Investment ISA, check on its performance at regular intervals - every three months is reasonable.

Remember, if you would like to talk to someone about ISAs or any other financial matter, come in to a branch. Just use this locator to ring (or call by) to make an appointment.