Guide to savings accounts

10. Individual savings accounts (ISAs)

Between the years of 1987 and 1999 there were Personal Equity Plans (PEPs). These were designed to allow investors to invest some money on the stockmarket without paying income tax or capital gains tax on the profits.

Also running at the time of the PEP was the Tax-Exempt Special Savings Account (TESSA) which was introduced to attract savers. The incentive was that any interest earned on the TESSA was tax-free.

At the start of the 1999/2000 tax year the Individual Savings Account (ISA) was introduced and replaced the PEP and the TESSA.

Two main types of ISAs were introduced to replace PEPs and TESSAs: the maxi ISA and the mini ISA.

Tax-free savings

You can save cash in an ISA and any interest you earn will be tax-free. You can also invest in shares or funds in an ISA where you will not pay tax on any capital growth or dividends that you receive.

ISA limits

There are limits to how much you can invest in cash ISAs during each tax year. The tax year runs from 6 April to 5 April.

From 6 April 2010 ISA limits will be increasing (to see more information on these increases please see our blog article 'New ISA allowance for 2009 to 2010' so that during the 2010-2011 tax year you can invest a maximum of £10,200 in an ISA, £5,100 of which can be saved in cash.

The start of the new tax year means that your limit restarts and you can save/invest your new limit on top of any money you saved in previous years (i.e. if you saved £3000 in the tax year of 2006/2007, you could save another £3000 in the same account in 2007/2008 so that at the end of the tax year you would have £6000 in your account).

 

Rules for ISAs

How many ISAs am I allowed to invest in?

• In each tax year you can either invest in one stocks and shares ISA (and invest up to £3,600 in cash and up to £3,600 in stocks and shares or just £7,200 in stocks and shares) or one cash ISA (and invest up to £3,600 in cash).

• In one tax year you cannot invest in both a stocks and shares ISA and a cash ISA

• You are not allowed to open more than one ISA in the same tax year (you can either open a cash ISA or one stocks and shares ISA)

• You are not allowed to invest in two different ISAs in the same tax year.

Transferring an ISA

You can transfer your ISA to another ISA manager as long as:

• The type of ISA is the same – you can’t move funds from a cash ISA to a stocks and shares ISA

• The funds are directly transferred between the existing ISA manager and the new one

• The existing ISA manager arranges the transfer – you can’t do it yourself by transferring the funds to the new ISA and then closing the first ISA

Who can have an ISA?

To pay into an ISA you have to be:

• A UK resident – there are two exceptions: Crown employees (e.g. diplomats and members of the armed forces), who are currently employed overseas but are paid by the government; and their wives, husbands or civil partners

• Over 18 for stocks and shares

• Over 16 for cash

You cannot have a joint ISA; it must be one person’s name.

Access and ISAs

Gaining access to your funds very much depends on the ISA manager. Some ISAs are instant access whereas others stipulate that you must give notice before withdrawing funds or else lose out on interest.

Any money removed from an ISA will still be counted towards your yearly limit. For example if you have paid in your £3,600 limit already and you remove £500, you have still used your £3,600 deposit limit and will be left with £3,100 in your account.

Familiarise yourself with your ISA’s terms and conditions if you are unsure about how and when you can access your funds.

Stocks and Shares ISAs

Stocks and shares ISAs can contain cash and investment-based life insurance or stocks and shares.

However, all investments in a stocks and shares ISA must be with the same ISA manager.

ISA managers include banks and building societies, National Savings and Investments, financial advisers and supermarkets and retailers. All ISA managers must be authorised by the Financial Services Authority (FSA). Check the FSA website for a list of authorised ISA managers.

Savings limits

In the tax year 2008/2009 you can save up to £7,200 in a stocks and shares ISA.

This can either be up to £7,200 in stocks and shares ISA or a combination of £3,600 cash and £3,600 stocks and shares.

Cash ISAs

Cash ISAs can contain only cash.

Savings limits

In the tax year 2008/09, you can save up to £3,600 in a Cash ISA.

TESSA only ISAs (TOISAs)

The TOISA was introduced for those people who invested in TESSAs between 1 January 1991 and 5 April 1999.

Those with TESSAs could move their original capital, up to £9,000 saved over the run of the original TESSA and not yet withdrawn from the account, into a TOISA without impacting on their new ISA limit.

TOISAs cannot be opened anymore – they were just for those people who had TESSAs that were about to mature when the TESSA was scrapped and the ISA introduced.

In the same tax year you could open a TOISA and open another form of ISA (in line with standard ISA rules). Further funds could not be added to the TOISA but the interest would still be tax-free and could compound.

 

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• Next page: Helpful links for further savings information
• Previous page: Online savers
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Guide contents

1. What is a savings account?
2. Savings accounts and interest rates
3. Tax and UK savings accounts
4. Opening a savings account
5. Adding money to a savings account
6. Accessing money in a savings account
7. Regular savings accounts
8. Instant access savings accounts
9. Online savers
10. Individual savings accounts (ISAs)
11. Helpful links for further savings information

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