Individual Savings Accounts / ISAs

1999 saw the introduction of a new type of savings account: the Individual Savings Account, or ISA. It allows savers to save a limited amount tax-free per annum; currently (tax year 2008/2009) this limit is £7,200. There are two different types of mini ISA in which savers can choose to invest: a mini cash ISA and a mini stocks and shares ISA. You can invest £3,600 in one or both mini ISAs or simply £7,200 in a regular ISA, which will invest part of your money in cash and part in stocks and shares. ISAs are required to adhere to the Individual Savings Account Regulations of 1998 and other statutes which include the following guidelines:

• account holders must be 16 years or older to open a mini cash ISA and 18 years or older to open a mini stocks and shares ISA or a regular ISA
• account holders can open only one of each type of mini ISA per tax year, which runs from the 6th April to the 5th April the following calendar year
• the maximum tax-free savings limit is set annually by the government
• direct payments into an ISA, for example from an employer, are usually not accepted: nor are direct debits or standing orders
• chequebooks and electronic account cards are not issued for the account

The maximum tax-free limit, set annually by the government, is the maximum amount that can be invested in an ISA at any time during the tax year. If you withdraw the funds from the account, they cannot be redeposited if the maximum tax-free limit for that tax year was previously reached. For example, if an account holder has deposited the maximum of £3,600 into his or her mini cash ISA, and subsequently withdraws this £3,600, they cannot invest this money again within the tax year.

Mini Cash ISA
The mini cash ISA is a tax-free savings option which does not demand long-term investment: some cash ISA providers offer instant access savings accounts, and so there are no penalties for making withdrawals. An account holder who is unexpectedly made redundant, or requires access to their savings in an emergency, can withdraw all their invested capital if necessary. Some ISA providers will however charge an early closure fee if you choose to withdraw your funds. Interest is paid gross, that is, tax-free, either monthly or annually depending on your ISA provider. Online cash ISAs, or e-ISAs, are also becoming common. Online ISAs require you to have internet access in order to manage your account, but usually benefit from more generous interest rates than high street providers. Online cash ISAs are subject to the same general rules as any other ISA.

Mini Stocks and Shares ISA
In addition to the mini cash ISA, you can open a mini stocks and shares ISA and invest a further £3,600. Alternatively you can open a regular ISA but choose to invest your capital only in stocks and shares, investing a total of £7,200 in the stock market. The tax-free savings limits will be adjusted yearly by the government. Stocks and shares ISAs allow the tax-free wrapper to be applied to existing stocks and shares that you have bought. Although a stocks and shares ISA is is a riskier option than a cash ISA, in that your shares and therefore your invested capital may reduce in value, the stocks and shares ISA offers higher potential returns. Stocks and Shares ISAs will usually involve administration charges, to cover the cost of managing the account and the stock market trading involved. Stocks and shares ISAs are available as online accounts, which may offer lower administration charges than regular accounts and enable instant viewing and management of stocks and shares via the internet.

Transferring Between Providers
If you have invested in a cash ISA but subsequently realise that the interest rate you have been given is low in comparison to other ISA providers, your funds can usually be transferred to another financial institution. You will need to ensure that the transfer meets the terms and conditions of the ISA agreement you signed, to avoid transfer charges and even losing your funds' tax-free status. If the funds are simply withdrawn in full and taken as a cheque to the next ISA provider, your money will no longer have its tax-free exemption. Some providers do not accept incoming ISA transfers, but those that do will require direct transfer between accounts. You can usually initiate an ISA transfer by filling in a transfer form from your current account provider and giving details of the account to which you wish to transfer your funds. You may be charged for choosing to transfer your funds to another provider, but if the terms of the new account are significantly better than those of your current account, this charge will usually prove a good investment.

Further Terms
ISAs are a saving initiative of the UK government. To open an ISA account you must usually be resident in the UK, and if you cease to be a resident you will be prohibited from making any further deposits to an existing account and from opening any new accounts. Nevertheless, your account will remain accessible from abroad, via telephone and online banking. You will need to reapply for ISA privileges if you did not pay any money into your ISA during the previous tax year. As of the 6th April 2008, funds in a mini cash ISA can be transferred to a stocks and shares ISA, but it is not possible to transfer money from a stocks and shares ISA into a mini cash ISA. Transferring money into stocks and shares should not affect your savings allowance nor your tax-free privileges.