What is an ISA?
An ISA is a ‘tax-efficient wrapper’ designed to go around an investment. Types of ISA include a Cash ISA and Stocks & Shares ISA. A Cash ISA is like a normal deposit account, except that you pay no tax on the interest you earn. Stock & Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds.
Some ISAs do tie your money up for a significant period of time. However, others are pretty flexible. If you’re after flexibility, variable rate Cash ISAs don’t tend to have a minimum commitment. This means you can keep your money in one of these ISAs for as long – or as short – a time as you like. This type of ISA also allows you to take some of the money out of the ISA and put it back in without affecting its tax-efficient status.
| Advantages | Disadvantages |
| • No tax liable on money invested or withdrawn | • The value of a Stocks & Shares ISA can go down as well as up depending on market circumstances |
| • Ability to save up to £20,000 each year | • No tax relief on the money you pay in |
| • Easy access to your money | • Maximum contribution £20,000 per year and cannot carry forward any unused contributions as you can with a pension |
| • Cash security ensured as part of the Financial Services Compensation Scheme limits | • Cannot be in joint names |
| • Potential investment growth | • Comparatively low growth potential of a Cash ISA |
| • Ability to move to and from a Cash and Stocks & Shares ISA | • Potential negative impact of inflation |
| • Flexible fund choices with a Stocks & Shares ISA | |
| • Suitable for a range of risk attitudes | |
| • Choice of investment for income, growth or both | |
| • On your death, your spouse/civil partner may receive an additional ISA allowance to allow the value of your ISA to be reinvested |