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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.

AdvantagesDisadvantages
• No tax liable on money invested or withdrawn • The value of a Stocks & Shares ISA can go down as well as up depending on market circumstances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