Understanding ISA’s

An ISA is an individual savings account and ISA’s came about in 1999 as a way to encourage people to save any spare cash they might have for the future. As an incentive tax free perks are offered on any money saved in this type of account and since their launch, ISA’s have proved to be extremely popular.

So how do they work? Well, basically there are two main types of ISA: mini cash ISA and a maxi ISA. Cash ISA’s are much more popular due to their familiarity to any savings account. They allow you to deposit a maximum of £3,000 in each tax year, which runs from 6th April to the following 5th April of the next calendar year. You can withdraw any sum you wish however you may not top up your deposit at a later date if you have already saved the £3,000 within that tax year. As your balance grows so does the interest rate on your capital.

A maxi ISA allows you to put in a total of £7,000 in any one tax year which is invested in stocks and shares. These are also known as equity ISA’s. However, many customers do not wish to invest their entire annual ISA allowance in stocks and shares. Therefore they open two mini cash ISA’s in which they can save up to £3,000 and the rest is invested into mini stocks and shares.

You are not permitted to open both mini cash and a maxi ISA in the same tax year regardless of how little you deposit to initially open the account. Nor can you switch from one account type to the other during the same tax year.

To open an ISA you must be a UK resident and you may not hold an account jointly or on behalf of someone else. A cash ISA can be opened by anyone over the age of 16 but for equity ISA you must be aged 18.

According to government sources, April 2008 is set to see a much more simplified system regarding ISA’s. A single ISA will therefore replace the current mini and maxi ISA’s allowing investors to invest up to £7,000. This amount can be divided into both cash and shares, although the £3,000 cash limit will stay in place. Another new feature will enable investors to transfer their saved cash into equities, including cash accumulated over the years, and this will not affect their annual allowance.

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Published on September 30, 2007