What is an ISA?
Individual Savings Accounts were introduced in 1999 to replace PEPs (Personal Equity Plans) and TESSAs (Tax-Exempt Special Savings Accounts).
The general purpose of these saving accounts is to increase annual earnings whilst saving your money- ISAs are tax-free on interest accumulated. The tax-free benefit is the main incentive that separates ISAs from other savings accounts. So instead of stashing your cash under the mattress in an attempt to save money, a safer and more sensible option is an ISA as it prevents you from grabbing sums of cash from your secret hiding place on a whim.
Individual Savings Accounts come in two varieties; cash and stocks/shares, but the variety of each option is much larger to cater to your individual desires.
To open a cash savings account you must be aged 16 or over, and 18 years or older to open a stocks/shares Individual Savings Account.
There are a two main types of ISA to choose from; instant/easy-access and fixed rate.
Which type of ISA is best for you?
Once you have decided which Individual Savings Account you need; cash or a stocks/shares ISA, the next step is choose which kind of account you want; instant/easy access or fixed rate.
Fixed rate accounts are for saving/earning large sums of money, as they guarantee a certain amount of interest over a set period of time (from one year onwards). Depending on your circumstances, there are a variety of fixed-rate ISA types each offering different interest rates and commitment lengths. Due to the contractual nature of fixed-rate accounts they offer their owners higher interest rates than most instant/easy-access accounts.
Instant access and easy-access
Instant or easy-access ISAs are for people who want access to their money whilst it is accumulating in their account. Depending on your choice however, some ISAs will penalise their owners for withdrawals and some will even grant bonuses if you do not withdraw any money.
Regardless of which format of Individual Savings Account you choose, be sure to read all of the terms and conditions of the account before you sign up as this will reconfirm that what the ISA is offering is what you want from it.
Like all good things, there are also disadvantages with Individual Saving Accounts. The main drawback to all cash ISA types is that the amount of money you can put in is capped (annual allowance) at £5640* per year. Stocks/shares ISAs are also capped with an annual allowance however it is twice the amount; £11,280*.
The key disadvantage for stocks/shares accounts though, is the fluctuating nature of the accounts; your investment can go down as well as up in value meaning it is possible that you will not make a profit.
*Figures given are representative for the tax year 2012/13
So which ISA do I choose?
In the current economy people have very different monetary wants and needs which is why there is such an extensive range of Individual Saving Accounts available from banks, building societies, supermarkets/retailers, financial advisers and many more outlets. Individual Savings Account managers (banks, building societies etc) will offer advice about their account types on offer but it is worth visiting online comparison websites for independent advice. Be sure to look out for public forums whilst browsing the web as these mediums in most cases will provide honest experiences from customers offering you guidance.
The more specific your account needs are, the more difficult you may find the answers to your questions. If this is the case then it is beneficial to contact ISA manager outlets directly. In many cases you will be able to schedule an appointment with an account manager who will be happy to help and answer your questions.
Government-owned websites such as Direct.gov.uk and HMRC.gov.uk are a great resource for finding impartial and official information, answering an abundance of questions regarding legality and statistics about Individual Savings Accounts.