Individual Savings Accounts, usually just referred to as ISAs, provide a means for savers in the UK to benefit from tax-free returns on money deposited. In an era when savings rates are so depressingly low, the advantage of not being taxed on your savings interest has become all the more important and can help to protect your money from the ravages of inflation.
When we talk of ISAs it’s important to note that there are actually two different types of ISA scheme, namely Cash ISAs and Stocks and Shares ISAs. Additionally, there are a number of rules and restrictions that apply that savers need to be aware of. In this article, I’ll outline what the difference is between Cash ISAs and Stocks and Shares ISAs, and the general rules that apply to them.
Cash ISAs are effectively just another basic instant access savings account but with two important differences. The first is that they are tax-free, so your interest will be paid Gross rather than Net. The second major difference is that deposits are subject to a maximum yearly allowance. For the 2010/11 financial year, the allowance is £5,100 and this will rise to £5,340 for the 2011/12 year.
The other key rules that savers need to be aware of are:
– Only one Cash ISA can be opened in any financial year.
– Cash ISAs are only available to those aged 16 or over.
– The financial year runs from the 6th of April until the 5th of April. So if you’re still intending to deposit some money this financial year, then make sure you get it in before the 5th of April.
– Most Cash ISAs enable you to withdraw money from your ISA as often as you like. The exception to this is where the bank is offering a fixed rate ISA rather than a variable rate ISA. With fixed rate ISAs, you normally will find that there is a restriction on the number of withdrawals that you’re allowed during the year.
– Interest is usually applied to the account annually, in April.
Stocks and Shares ISAs:
Many savers like to split their disposable income between low-risk moderate return savings accounts and slightly more risky (but hopefully higher return) investment products. The good news, therefore, is that you can also take out a Stocks and Shares ISA. The key rules relating to Stocks and Shares ISAs are:
– They are only available to individuals aged 18 or over.
– As with Cash ISAs, you can only open one Stocks and Shares ISA in any financial year.
– The maximum yearly amount you can put into a Stock and Shares ISA is £10,200; or £5,100 if you have also opened a Cash ISA.
The way to get the most out of your ISA entitlement is to invest the full allowed amount at the earliest opportunity, so there is always a flurry of deposits on or around the 6th of April. However, for many, it may not be feasible to pay in the full amount but the beauty of ISAs is that you can choose how much you wish to deposit. Additionally, with Cash ISAs, you usually have the flexibility of being able to withdraw money if you suddenly find that you need to get access to the funds.