An A to Z of ISAs for First Time Savers

ISAs can seem complicated to the first time saver, but in reality they are a very simple and effective way of protecting your savings from the tax man and letting your money do the hard work for you. Here is a basic A to Z of ISAs that should help you get to grips with the way ISAs work.

Actively Managed ISAs. For those that want to take full advantage of the ISA allowance (see below) but aren’t too sure about investing in stocks and shares themselves, companies like Legal & General* offer Actively Managed ISAs, where an expert fund manager makes decisions on the customer’s behalf.

Allowance. The Government have imposed an annual ISA ‘allowance’, as they cannot afford to make all savings tax-free. The total allowance, per tax year, is £7,200. However, it is worth remembering that only £3,600 of this can be in the form of a cash investment – the remaining £3,600, if you wish to use it, must be in the form of stocks and shares.

ISA. The term ISA stands for Individual Savings Account. The key thing to know about ISAs is that they are not so much a product as they are a tax-free wrapper for you to put around your savings. Ordinarily, a customer would have to give between 20-40% of the interest they earn on their savings to the tax man – an ISA protects your savings and lets you keep all of your interest for yourself.

Unit Trusts. ISAs can contain investments of two types – cash, or stocks and shares. Once you have used the £3,600 cash allowance you may choose to invest another £3,600 each year in shares. Self-select ISAs exist for the purpose of shares in individual companies, and are usually managed by stockbrokers. More commonly, however, the shares allowance is used for collective investments in the form of unit or investment trusts. These pooled investments involve a fund manager who selects shares on the customer’s behalf, with the value of the investment depending on the collective performance of the selected shares.

Withdrawal. Generally speaking, it is unwise to withdraw money from a cash ISA unless absolutely necessary. As soon as you do this, you lose all tax-free benefits on those savings, and cannot invest more until the next tax year. Your allowance does not change depending on the balance of your ISA – once you have invested £3,600, you cannot withdraw £1000 and then replace it again.

Ultimately, ISAs have become easier to use and understand over the years, and are a very effective way to keep the tax man away from your savings.

*Visit the website to find the right ISA for you.