Individual Savings Accounts Explained

Nearly everyone has heard of an ISA (Individual Savings Account).  Still, simply because an acronym is familiar does not necessarily signify that it is understood.  In order to leverage the benefits associated with such financial vehicles, it is important to understand how they function as well as what options are at your disposal.  Let's take the guesswork out of ISAs by examining them in greater detail.

How Does an ISA Work?

The main purpose of any ISA is to allow the account holder to accrue tax-free savings over time.  Returns such as interest or profits from investing are not subject to capital gains tax up to a point.  In fact, anyone who is 16 years of age or older can place as much as £ 20,000 pounds into such an account during a single fiscal year.  These are also very flexible vehicles, as there are a number of interesting variants to choose from.  Let's look at the three most common ISAs on the market today.

Cash ISAs

Building societies and banks will often offer cash ISAs to their customers.  As you might imagine, the exact stipulations and provisions will vary from firm to firm.  The main point is that you can place cash into these accounts without being concerned about tax contributions (up until the limit previously mentioned).  Cash ISAs are often preferable to standard savings accounts.  Please note tht all funds up to £ 85,000 pounds are protected by the government and you have the option of withdrawing this money when you prefer.  The only downside is that instant cash ISAs are often associated with slightly lower interest rates.

Stocks and Shares ISAs

If you are looking to have your money work for you as opposed to the other way around,

a stocks and share ISA could be the perfect option.  Unless you are an experienced investor, the account will be overseen by a wealth manager.  Your funds are spread across a wide range of assets such as commodities, CFDs, blue-chip holdings, futures, and bonds.  The yields are generally predictable and these vehicles are excellent methods to create a financial nest egg.  However, a certain amount of risk is always involved.

Junior ISAs

Parents will often choose this option in order to put money away for a young child.  At the time that this article was written, the annual deposit limit was £ 4,128 pounds.  Once again, the tax advantages could be well worth the commitment to such a scheme.

You should ultimately choose the correct plan based upon your financial requirements as well as your state of liquidity.  The main purpose of an ISA is to allow the interest to accrue over time, so withdrawing the funds essentially defeats the purpose.  Finally, research all relevant providers in order to better appreciate what each has to offer.  Making the correct decision today could very well provide you with a welcome source of income in the future.