Introduction to ISA's

An Individual Savings Account, or ISA, is a type of bank account. Holders of an ISA are eligible for tax advantages if they are a UK resident and over the age of 16, especially when compared to having money in a regular savings account. ISAs are a great option to save up for a large expense, like going on a holiday or buying a new car. They are also good options to save money in case you need it down the road.

About ISAs

ISAs are tax-advantaged savings accounts that were first introduced by the UK Government in 1999. ISAs replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). Funds in ISAs are exempt from income tax and capital gains tax, including investment returns from ISAs. Tax is also not payable when money is withdrawn from an account.

These accounts can be used to hold cash and a range of investments. Cash ISAs are typically offered by banks and building societies as well as some investment firms. Stocks and Shares ISAs are available from banks, investment firms and other financial institutions. Unlike cash-only ISAs, these accounts can be used for a range of non-cash investments. Stocks and Shares ISAs are similar to old PEPs, while Cash ISAs are similar to TESSAs.

From 1 July 2014, all existing and new ISA accounts became 'New ISAs' or NISAs. The change reflects greater flexibility for ISAs, including increased contribution limits in each fiscal year and fewer restrictions. The maximum annual contribution is now £15,000. The ban on transferring from a Stocks and Shares ISA to a Cash ISA was also removed. Interest on cash in a Stocks and Shares ISA is no longer subject to a 20 per cent charge and cash can now be held in a Stocks and Shares ISA even if it is not for an investment. The old '5% Test' was also removed, which required a credible possibility of losing at least five per cent of investments in a Stocks and Shares ISA.

How ISAs Work

ISAs are available to any UK resident over the age of 16. Individuals between the ages of 16 and 18 can apply for a Junior ISA or an adult Cash ISA. There are no restrictions on how much money can be withdrawn at a time from an ISA. Similarly, there are also no restrictions with respect to when funds can be taken out from an account. At the same time, funds in an ISA cannot be used as security for a loan and it is not considered a pension product. Almost all contributions must be made in cash unless the ISA is part of an employee share ownership plan.

Cash ISAs

Funds in a Cash ISA must be made available to the account holder within 15 days of a request. Certain ISA providers may charge a loss of interest penalty when withdrawals are made. Providers may also offer term deposits, which restrict withdrawals within a set period of time. ISA providers are required to provide details on the level of protection for deposits. Typically, £85,000 protection under the Financial Services Compensation Scheme (FSCS) is provided. Unprotected accounts are also permitted, as well as a £50,000 protection option. In some cases, Cash ISA can hold eligible investments that are not within the scope of Stocks and Shares ISAs.

Stocks and Shares ISAs

Stocks and Shares ISA providers must make funds available to account holders within 30 days of a request. A loss of interest penalty may be charged for withdrawals. Qualifying investments include cash, Undertakings for Collective Investment in Transferable Securities Directives (UCITS) authorised funds (for example, unit trusts and open-ended investment companies), certain investment trusts, public debt securities (for example, government bonds, corporate bonds, Eurobonds and debentures), some Core Capital Deferred Shares issued by building societies, and some insurance policies and other investments. Stocks and Shares ISAs may also be used stock market company shares that are listed in a recognised stock exchange. In order to qualify, shares must be a full listing and cannot include AIM PLUS-quoted and PLUS-traded market segments, futures and options, shares in unquoted companies, and warrants.

Junior ISAs

Since 2011, Junior ISAs have also been available to anyone under the age of 18 born on or after 3 January 2011 or does not have a Child Trust Fund (CTF) account. A parent or guardian must open an account for the account holder. A child can only hold one Cash ISA and one Stocks and Shares ISA. Since 2014, the subscription limit for Junior ISAs is £4,000. A Junior ISA converts into an adult ISA when the account holder turns 18. Cash and Stocks and Shares Junior ISAs are available, although money cannot be withdrawn until the account holder is 18. Funds can be withdrawn earlier due with a terminal illness claim or when closing an account as a result of the account holder's death.

Getting an ISA

A number of authorised ISA managers offer ISAs, including most major banks and building societies. Investment firms and National Savings & Investments also offer ISAs. Anyone interested in a Stocks and Shares ISA should contact a fund manager, bank or financial advisor for more information.

Resources

Gov.uk ISAs
Authorised ISA Managers