Types of ISA
There are 4 main types of ISA - cash ISA, Stocks and Shares ISA, TESSA and enviromental ISAs.
An Individual Savings Account is an account designed for the purpose of investments and savings with a higher interest and lower tax rate of those of a standard savings account.
Savings are not subject to income tax or capital gains tax whilst in the account or upon withdrawal and so are often peoples first consideration when looking to start saving.
There are currently a number of different types of ISA available to people in the UK.
Cash ISA (mini ISA)
This functions very similar to an ordinary savings account (other than the tax free status) in that you can deposit and withdraw an amount of money at any time. Your savings are kept intact plus interest - often accrued at a higher rate than similar taxable accounts from the same bank or building society.
It can also be used to hold an investment that fails the five percent test for holding within stocks and shares ISA.
Limitations of a cash ISA
The Annual Cash limit that can be deposited in a Cash ISA is currently £5340 (as of 2011/2012).
This means that if money is taken out and replenished continually, the deposit limit can be reached long before the balance reaches the set maximum.
For example, depositing £1000 but withdrawing £500 then depositing a further £1000 will leave a balance of £1500, yet the deposited amount is already at £2000.
The minimum age for opening a Cash ISA is 16.
Stocks and Shares (maxi ISA)
These can be used to hold investment funds or individual stocks and shares. Using this type of ISA does carry risks and should be looked at as a medium to longer-term investment option, for money that can be locked away for the future.
Limitations of a Stocks and Shares ISA
The Annual Cash limit for investment in a Stocks and Shares ISA is currently £10,680 (as of 2011/2012), providing you haven’t already taken advantage of the cash ISA, in which case the maximum amount allowed is reduced by the amount already invested.
If the Cash ISA is full, your remaining allowance will be £5340.
- The minimum age for opening a Stocks and Shares ISA is 18.
TESSA or (Tax-Exempt Special Savings Account) was one of the first tax-free savings accounts, established by John Major in 1990. It was introduced as a low risk counterpart to the PEP (personal equity plan), to encourage saving to a wider range of people.
In 1999 TESSA’s were replaced by ISA’s and existing investments were allowed to be transferred into TOISA’s (or TESSA only ISA). On 5th April 2008, TOISA’s became legally the same as cash ISA’s and as such are now completely interchangeable.
An environmental ISA, sometimes called an ‘ethical’ ISA uses money to invest only in companies which participate in ‘green’ activities. Virgin and HSBC have versions of environmental ISAs.