What is an ISA?

ISAs (Individual Savings Accounts) are savings & investment accounts that protect your money against tax. In the 2012/2013 tax year, you can save or invest up to £11,280 without paying tax on any interest or dividends you earn or any investment growth.

The £11,280 maximum relates to the amount of money you can pay into ISAs each tax year it is not the maximum account balance you can hold in your ISA. Once the full allowance has been used you can’t add any more until the following year, even if you make any withdrawals during the year.

The ISA year runs from 6th April one year to 5th April the next (6th April 2012 to 5th April 2013) you get a new contribution allowance each tax year. If you don’t use your annual allowance by the end of the tax year, you lose it; it’s not possible to carry any unused allowance over from one year to the next.

There are 2 different types of ISA; Cash ISAs and Investment ISAs.

Cash ISAs

They are designed for the purpose of saving in a favourable tax environment. Money is contributed from after tax income and not subjected to income tax on withdrawal. There is no restriction on when or how much money can be withdrawn unlike a pension but ISAs are often used to complement a pension for retirement income.

Cash deposited is similar to any other ordinary savings account, apart from the tax-free status.

You can save up to £5,640 in the 2012/2013 tax year which as you will notice is half the annual limit. Cash ISAs are available as instant access or fixed term accounts. There are no rules to contributing, you can save a lump sum or make regular contributions. There is no capital risk to your money but it may of course suffer inflation risk.

You can transfer your money to an Investment ISA at any point but Investment ISAs can’t be transferred into a Cash ISA.

They are available to UK residents over the age of 16.

Stocks & Shares ISAs

They are designed for the purpose of investing in a favourable tax environment. Money is contributed from after tax income and not subjected to income tax or capital gains tax on withdrawal or when switching funds. A broad range of investments can be held and there is no restriction on when or how much money can be withdrawn. As with Cash ISAs they are often used to complement a pension or retirement income.

You can invest up to £11,280 in the 2012/2013 tax year less any amount you’ve saved in a cash ISA that same year

It is possible to manage your investments yourself or invest in a collective investment fund where a professional fund manager does it for you. Unlike a Cash ISA, your money is not guaranteed; it’s possible your investment could go down in value as well as up. Dependent on your attitude to risk, it’s up to you to decide how much risk you want to take on. Investments can be made as a lump sum or on a regular basis.

Depending on what you invest in you may be subject to various management charges for the fund platform, the ISA provider or the investments held. You must be UK resident and over the age of 18 to open a Stocks & Shares (Investment) ISA.

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Junior ISAs

Junior ISAs are tax-free savings & investment accounts for children.

They were introduced on 1st November, 2011 as a replacement for the outgoing Child Trust Fund, and are designed to help you save for your child’s long term future.

Consequently, any money saved or invested in a Junior ISA cannot be withdrawn until your child turns 18.

There is an annual limit to how much you can save or invest in a Junior ISA tax free – the limit for 2012/13 is £3,600. If you don’t use this annual allowance in full before the end of the tax year (5th April) then you lose it; you cannot carry over any unused allowance from one year to the next.

Any child that didn’t qualify for a Child Trust Fund and is still under 18 can open a Junior ISA. Essentially this means that any child born before September 2002 or after 3rd January 2011 is eligible for a Junior ISA.

If your child has a Child Trust Fund they cannot open a Junior ISA. At present it’s not possible to transfer money in a Child Trust Fund to a Junior ISA but this may change in the future.

Similar to ISAs for adults there are two different types of Junior ISA: Junior Cash ISAs and Junior Investment ISAs; it is possible to open one of each type of account for your child.

Junior Cash ISAs

They are similar to children’s savings accounts but have a maximum investment limit. You can save up to £3,600 each tax year minus any money invested in a Junior Investment ISA. Similar to a normal Cash ISA; interest is earned on savings, there is not capital risk but inflation risk still applies. There is no tax to pay on interest there is the option to transfer your child’s money to a Junior Investment ISA or to a different Junior Cash ISA provider. Fixed rate or variable rate Junior ISAs are available and contributions can be made as a lump sum, or regular payments.

Junior Investment ISAs

Similar to adult Investment ISA’s with the exception of tax free saving limit of up to £3,600 each tax year minus any money saved in a Junior Cash ISA that year.

Only one Junior Cash ISA and one Junior Investment ISA can be held at a time. Junior ISAs can only be opened by parents or guardians but anyone can contribute to them. Money saved in a Junior ISA cannot be withdrawn until your child turns 18.

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