ISA (Individual savings account) short tutorial and help
UK government want to encourage people to save and invest. Hence in April 1999 government launched ISA (Individual Savings Account). They are designed to help the value of your money grow and/or provide an income. The main advantage is we don't have to pay tax (Capital Gains Tax) to the government for the profit that we make (capital gains), even if we are a higher rate taxpayer. Essentially, we can use it as a wrapper, putting it around whatever we are saving or investing in. Interesting right? Although ISAs are tax efficient, the underlying investments may have to pay tax that can not be reclaimed.
Types of ISA:
1. Cash ISA: This is a low risk place to invest money. Low risk also means low return. So there is less chance that you will loose your investment but the profit (capital gains) that you make will also be lesser. Different types of cash ISA are available including fixed rate and variable rates. The fixed rate ISAs offerss different interst rates depending on the bank. For instance Bank of Scotland offers 4.25 % interest rates, but you have to invest your money for 4 years with a minimum opening balance of £500. However, if you opt for a varible rate cash ISA you will get only an interst of 0.2% but you can open the account with £1 minimum balance and you can have unlimited widrawals.
A conventional cash ISA allows you to invest in deposits accounts where you can get interest, where as a cash fund ISA pools your money with that of other investors into a fund, which then invests in cash-based assets and short-term money market investments that are of a relatively low risk/return nature.
2. Stocks and shares ISAs: In this you can put money into funds that invest in stocks and shares without paying tax to the government for your capital gains. However, this is a high risk, high return account than a cash fund and normally aim to provide long-term capital growth (around 5 years).
General ISA risks:
ISAs are not bank deposits. They are subject to investment risks, including possible loss of the principal amount invested. This means you might get back less than you invested.The risks involved in ISAs are similar to the risks in investing in stocks and shares. The only difference is that you don't have pay tax to the government for your capital gains. In order to minimize the risks financial institutions diversify the investments. They will consider three things before suggeting you where to invest
- your investment aims and objectives
- time horizon(long term/ short term)
- your overall appetite for risk.
Fees for opening an ISA account:
Different banks and financial institutes have different fees for the ISA account. For example citibank investment ISA has a initial charge of 2% along with an annual management charge of 1.25%, 1.35%, or 1.50% (depending on the fund).
You can transfer the money you have invested in your Cash ISA to an Investment ISA. However, transfers the other way round (Investment to Cash ISA) are not permitted.
ISA account rules:
There are three mains rules of opening and investing in an ISA.
1. You have to be 18 (16 for cash ISAs)
2. You have to be a UK resident
3. Overall you now have an allowance of £10,200 in each tax year. This you can divide between cash ISA and stocks and shares ISA. However, you can have a maximum of only £5,100, but for stocks and shares ISA, your limit is £10,200.
Check the table below to see a small example.
An example ISA
Stocks and shares ISA
How to open an ISA account?
At the end of this section I have listed the names of some of the reputed firms who can help you to open an ISA account. These firms are selected based on the best interest rates they offer. However, they have different minimum investment requirements. You can easily open an ISA account if you go to a bank in UK. But the problem is, as these banks uses the services of financial companies to invest the money, we have to pay commission to the banks. For instance Citibank uses the help of M&G to do the investments. Hence we have to give an initial charge of 2% to citibank. However, if you go to M&G directly you can avoid paying this initial cost. .
3. Invesco Perpetual
4. Henderson investers
7. Invesco Perpetual
9. Legal & General
10. Royal Bank of Scotland
If you like to compare the interest rates of differnt companies, check the link here