ISA stands for Individual Savings Account, a partial misnomer because whilst some ISAs are indeed savings accounts, others are not. An ISA is actually a wrapper round something else (a bit like a gift-wrapped present, the present is the more important thing).
An ISA can be one of two things
- a savings account
- an investment account
The sorts of ISAs that are savings account are called cash ISAs and theyÂ work in exactly the same way as any otherÂ savings account. You put in money, the bank / building society pays you interest and the capital is safe.Â
There are only two other real features, one positive, one negative. Looking on the bright side first, any interest earned in an savings ISA is paid tax-free. On the downside, there is a maximum amount of money you may put each year into a cash ISA.
The sorts of ISAs that are investment accounts are usually called stocks and shares ISAs. Through these you can invest in unit trusts, exchange traded funds, bonds,Â individual company shares… These work in exactly the same way as other unit trusts, etc. You put in money, it is invested, the value may go down as well as up.
There are only two other real features, one positive, one negative. Looking on the bright side first, anyÂ capital growthÂ in anÂ stocks and sharesÂ ISA is paid tax-free. On the downside, there is a maximum amount of money you may investÂ each year into aÂ stocks and sharesÂ ISA.
The limits to the amount of money that you may put in are currently as follows (financial year 2007-2008):
You may invest up to Â£7000 in total.
You may invest up to Â£3000 in a mini cash ISA and up to Â£4000 in a mini stocks and shares ISA.
You may invest up to Â£7000 in a maxi stocks and shares ISA.
There we go easy as pie.
- basic guide to Stocks and Shares ISAs part 1: all about you
- the great ISA stampede
- basic guide to Stocks and Shares ISA: conclusions