Isas: what they are and how to get one
In the current era of ultra-low interest rates it is important to make the most of your savings.
One of the best ways to do this is to keep the amount of tax you pay on your savings to a minimum.
The government allows you to do this by using a special kind of account called an individual savings account (Isa).
This is a tax-efficient way to save or invest, with no tax liability when the proceeds are withdrawn.
Any growth in the value of your savings or investments will be free of capital gains tax and there is no liability to tax on any income taken from the fund.
An Isa is not an investment in itself but a wrapper to shield an investment from tax - whether it is cash, bonds or equities.
There are two kinds of Isa: Cash Isas and stocks & shares Isas.
A cash Isa could be in the form of bank and building society deposits, and some money market unit trusts.
Some National Savings products may also be included, as well as a range of existing savings bonds and accounts on which tax is normally payable.
Stocks and shares Isas, often referred to as investment Isas, can include most authorised unit or investment trusts, open ended investment companies (OEICs) and exchange traded funds (ETFs), as well as any share quoted on a stock exchange recognised by HM Revenue & Customs (HMRC).
If you want to invest in individual shares or choose the funds yourself, a 'self-select' Isa may be suitable.
Unit trusts and OEICs can usually be bought more cheaply within an Isa wrapper, as fund management groups often offer discounts on initial charges, particularly in the run-up to the end of the tax year in the period between January and March.
If you have a fund in mind for investment it is often worth shopping around as charges can vary between outlets.
Stocks and shares Isas are not entirely tax free; you pay no tax on any growth in the value of your investments, either during the time of investment or when you take your money out, but tax at 10% is paid on any dividends received within the fund.
Everyone aged over 16 can have a cash Isa, and those over 18 can also have an investment Isa.
For the 2012-13 tax year you can make a maximum investment of £5,640 in a cash Isa or £11,280 in a stocks and shares Isa.
If you put money into a cash Isa the balance up to £11,280 may be invested into a stocks and shares Isa.
These limits are for each person, so a couple could invest as much as £22,560 in Isas in each tax year.
From 6 April 2013 the Isa limits for each person will rise to £5,760 and £11,520 respectively.
How to find, open and use an Isa
Defaqto's research shows that there are 185 different stocks and shares Isas available, from 123 different companies.
These companies include banks, investment firms, fund managers and other authorised institutions, as well as 'fund supermarkets' and discount brokers.
If you want advice on what to invest in, your local adviser will probably help.
If you are confident in your selection you can usually go direct to the Isa provider.
You can normally invest in an Isa via lump sums, while nine out of 10 providers will also allow you to make regular monthly investments.
The minimum lump sum investment required is typically £500 or £1,000 but one in seven providers have higher minimums than this.
Regular monthly contributions are typically a minimum of £50 or £100, although some allow lower regular contributions.
An investment Isa can therefore be used as a tax efficient regular savings plan.
All stocks and shares Isas (and cash Isas for that matter) will allow transfer to another Isa provider without affecting your annual allowance.
What charges are involved?
You can only open one stocks and shares Isa and one cash Isa in any one tax year.
Once investment into an Isa has been made, this counts against your annual Isa allowance, even if you make a withdrawal in the same tax year.
The majority of investment Isas come with initial and annual management charges, which usually reflect the charges of the underlying investments.
The initial charge on investment funds placed within an Isa can range from 2.5% to 5%, although many outlets offer discounts of 2-3% off initial charges.
The annual management charge is typically between 0.5% and 2% depending on the type of fund selected.
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