Isas Explained

By Author: Lecia Selbo
Total Articles: 49
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If you want to start building up your savings, then your first step should be to open an ISA. The great advantage that ISAs hold over standard savings accounts is that they permit you to earn interest tax free ? great for higher rate tax payers, in particular.

Unfortunately, individual savers are only permitted to deposit ?7,200 in an ISA each tax year; and of that, only ?3,600 can be put in cash. This will rise to a total of ?10,200 in April 2010.

There are two types of ISA: cash, and stocks and shares. Cash ISAs work just like regular savings account, the only difference being that the interest earned on your capital isn''t subject to taxation. They tend to offer lower interest rates than other savings plans; but when you bear in mind that basic rate taxpayers could earn a quarter more interest at the same rate and higher-rate tax payers two-thirds more, they are generally a more profitable option.

While a cash ISA will allow you to accrue tax-free interest with minimal risk and easy transfers, those ready to risk their capital may do better with a stocks and shares ISA. You''ll need to be prepared to ...
... lock your money away for longer ? but you may be rewarded with high returns.

Put simply, a stocks and shares ISA allows investors to accrue tax free savings through speculating on investment funds or individual stocks and shares. Your capital won''t necessarily be protected as it would in a cash ISA, but for many the risk is balanced by the potential rewards.

Unless you''re familiar with the financial world then your best bet is to go for a capital-protected ISA as opposed to an emergency markets fund. With lower charges and less risk of losing your savings, this is a good option for those just starting out.

Bear in mind that you''ll need to invest for a minimum of three to five years to have a chance of good returns, so this isn''t a route for those who need instant access to their cash. It''s also important to do your research into fund performance before committing, and be aware that you may have to pay management charges.

On the plus side, a stocks and shares ISA will allow you to benefit from a large variety of investment options as well as higher tax-free returns. If you''re prepared to do your research and familiarise yourself with the best performing funds out there, then investing in this type of ISA can be a great way to boost your savings. Lecia Selbo opened a stocks and shares ISA with Legal