plonkee money an english-er's thoughts on personal finance

June 7, 2007

what is an isa?

Filed under: investment,savings — plonkee @ 11:27 am

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 they work in exactly the same way as any other savings account. You put in money, the bank / building society pays you interest and the capital is safe. 

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, 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, any capital growth in an stocks and shares ISA is paid tax-free. On the downside, there is a maximum amount of money you may invest each year into a stocks and shares 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 £7000 in total.

You may invest up to £3000 in a mini cash ISA and up to £4000 in a mini stocks and shares ISA.

Or…

You may invest up to £7000 in a maxi stocks and shares ISA.

There we go easy as pie.

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