An ISA – or individual savings account – is a tax-free savings or investment account. ISAs are numerous – with many options to choose from. In fact, there have been so many changes to the ISA rules over the years and so many new ISAs that it is often a struggle to keep up.
The large range of ISAs available includes:
- Cash ISAs
- Fixed rate ISAs
- Stocks and shares ISAs
- Help to buy ISAs
- Junior cash ISAs
- Junior stocks and shares ISAs
- The terms of each ISA vary, with a maximum annual investment associated with each.
Two of the most popular ISAs are cash ISAs and fixed rate ISAs.
Why choose an ISA?
Ignore the fuss of the different and abundant types of ISA available and the theory behind the account is actually very simple. Tax free, an ISA is the ideal way to save. Low risk, ISAs tend to provide better interest rates than regular savings accounts. You can also pay in as much or as little as you choose, providing the amount is within the capped limit.
ISAs can form a valuable part of your savings portfolio, but it pays to look around to make certain your cash works hard for you.
What is a cash ISA?
A cash ISA is similar to a traditional savings account, except there is a limit on the amount of cash you can pay in and there is no tax payable on any interest you earn. The amount you can pay into a cash ISA is currently capped at £20,000 per year.
Any funds in your cash ISA are exempt from tax payable on interest accrued.
What is a fixed rate ISA?
A fixed rate ISA locks your savings away for a fixed term, usually between one and five years. This type of ISA is ideal if you wish to tie up your savings. Fixed rate ISAs often require a lump sum investment.
The interest rate is higher as standard, although you will receive a better interest rate the longer you fix your savings for.
If you want to access your savings in the fixed term, you will be penalised in the form of a fixed fee or a reduction in your interest rate.