Investigate Investing: Your ISA Options Explained
With interest rates still hovering just above zero per cent, finding a reliable way to invest your savings can prove to be problematic at the moment. Many savers have wondered if a traditional savings account is worth considering at all, given the low return on their investment. Fortunately, for those not keen on investing their cash in other areas, there are some financial products worth serious consideration, such as: ISA accounts.
ISA accounts have been aggressively advertised on television recently and people have been encouraged to consider them as a good way to get a better return on their savings. Despite this, many people remain confused as to what an ISA actually is, the level of return they can expect on their investment and any risks involved in opening an account.
What is an ISA account?
An ISA account is a tax efficient wrapper, where you can shelter your investments and the interest earned on them from the taxman. The first thing to note about ISAs is that there are currently two different types available: A Cash ISA and a Stocks and Shares ISA.
A Cash ISA is, in essence, a savings account with a higher rate of interest because of its tax efficient status. This is a lower-risk form of investment as the financial institution you have invested with simply holds your cash, and then pays you a set rate of interest on the total sum you have invested. There are limits imposed on how much can be placed into an ISA during any one financial year. Currently, an ISA account holder can invest up to £5,340 in the 2011-2012 financial year.
A Stocks and Shares ISA is slightly different. This form of ISA operates initially in the same way, in that the investor places a sum of money into the ISA to open the account. Unlike a Cash ISA however, a Stocks and Shares ISA sees your provider invest your cash in stocks and shares.
This is higher risk than a Cash ISA, as the investments made by brokers are dependant on market fluctuation and may not give the return they were expecting. However, it does also mean that your investments can earn considerably more than a Cash ISA. The amount of money that can be invested in a Stocks and Shares ISA is £10,680 per financial year, double the amount you can invest in a Cash ISA.
Worth noting
Finally, for added peace of mind, it is worth noting that ISAs can be used in combination, if in any year the level of investment in them does not exceed £10,680. Therefore, a prudent investor could place a maximum of £5,340 a year in a Cash ISA as well as place £5,340 a year in a Stocks and Shares ISA.
ISAs are an appealing tax-free way to grow your savings and offer a flexible, simple way to ensure that your money continues to earn more for you in the long run.
The value of tax savings [and eligibility to invest in an ISA] will depend on individual circumstances and all tax rules may change in the future. The value of investments can go down as well as up and you may get back less than you invested.
About the Author: George Pardew is an independent advisor on ISA accounts.
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