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Guide to an ISA account

An ISA is an "Individual Savings Account". It provides a tax-free or tax-efficient way to save and invest. This means that no income tax or Capital Gains tax is paid on the interest or profits of savings or investments, up to the annual personal allowance.

White piggy bank savings

Why open an ISA?

An ISA is the most efficient way to save or invest. Paltry interest rates have been hampering savers since the recession, but an ISA can help boost returns because of its tax efficiency. Unlike a traditional savings account, no tax is paid on interest and less tax on profits, meaning more money in your pocket.

The ISA has recently undergone the biggest change since it was introduced as a replacement for Personal Equity Plans (PEPs) in 1999.

In the past there were just two types of ISA, cash ISA and stocks and shares, or investment ISA. However, as of April 2016, there are 4 types of ISA to choose from, a cash ISA, a stocks and shares ISA, a help to buy ISA and a IFISA (Innovative Finance ISA).

Who can open a ISA?

You must be a UK resident to open a ISA account. For a cash ISA, you must be aged 16 or over, and for a stocks & shares ISA, 18 or over. Children can open a junior ISA, which works in a similar way, but has a personal allowance of £4,128 (2017/18).

What is a Junior ISA?

In January 2011, the Junior ISA (JISA) was introduced to replace the old Child Trust Fund.

Just like the adult version, it allows children to save tax free or tax efficiently, depending on whether it is a cash or stocks & shares ISA.

The account is held in the name of the child, but opened and managed by the parent or guardian. The child can take over the management at 16, but is unable to withdrawn any cash until they are 18.

The personal allowance for junior ISAs in the 2017/18 tax year is £4,128, but if you’re aged between 16 and 18, you can open both a junior ISA and a cash ISA, boosting your annual allowance to £24,128.

How much can you save with an ISA?

The personal allowance in the 2017/18 tax year is £20,000, which can be made up of any combination of cash and stocks & shares.

Any unused allowance doesn’t rollover. So, unless the money is saved or invested in that tax year (i.e. before 5th April), the allowance will be lost.

Any savings or investments that have been deposited in earlier years continue to earn tax-free interest.

How to withdraw money from a ISA

Most ISAs provide instant access to your savings without losing the tax free benefits of the rest of the money in the account.

In most cases, account holders are provided with a passbook, which can be used to access the funds in the account. Also, the majority of banks and building societies now offer online banking facilities to make it easier to transfer funds.

How to switch ISA product

If you are unhappy with your current provider, it is possible to switch to another cash or stocks & shares ISA account shares ISA account. While it might seem like hassle, this is actually the only way to ensure you continually get the best interest rate.

However, when switching accounts it is imperative that you do not withdraw the cash and deposit it into another account yourself as you will lose the tax benefit. Instead, you have to transfer the account.

All you need to do is contact the new provider and fill out a form; they should do the rest on your behalf. It should take no longer than 15 days for cash ISA and 30 days for a stocks & shares ISA.