How to choose ISA accounts

In choosing an ISA, the saver must compare interest rates available. Higher rates may be available in fixed term ISAs or Internet savings accounts. An individual savings account (ISA) earns income and capital gains free of tax for the saver.

Features of an ISA

The total investment by each person in ISA accounts is limited to a certain amount in each tax year (£10,680 in 2011/12). Of this amount, the whole sum may be invested in a stocks and shares ISA. Up to £5,340 per year may be invested in a cash ISA, and the rest of the £10,680 allowance into a stocks and shares ISA. In choosing an ISA account, the saver must look at factors, such as the interest rate offered, the amount of funds to be invested in the ISA, the type of investments permitted within the ISA and the saver’s personal tax position. An individual who is not earning enough to pay tax, and does not expect this to change in future years may prefer to look for the highest interest rate whether or not this is in an ISA.

Finding higher returns

A saver who can benefit from the exemption from income and capital gains tax on earnings within the ISA may look at the possibility of a stocks and shares ISA. However, taxpayers must consider that shares are a risky investment, especially at times when economies are uncertain and may slip into recession. There is scope to earn high amounts in earnings and capital gains, but the value of the funds may also decrease if the share prices go down. Savers who want to go ahead with a stocks and shares ISA should consider the nature of the funds offered by the financial institution administering the ISA. A cautious fund of fixed interest instruments and defensive shares would be a safer investment than a riskier fund of emerging market shares. The interest rate may vary depending on the particular terms of the ISA. Where a notice period is required for withdrawals, it may be possible to obtain slightly higher interest than for an instant access ISA. If the saver opens an online ISA, this may have an interest rate a little higher than for an ISA that requires a passbook. A fixed rate ISA, where funds may not be withdrawn before the end of a particular term, such as three years, may pay a higher return. From November 2011, Junior ISAs are available to young people under the age of eighteen, provided that they do not already have a child trust fund. Anyone under 18 may open a Junior ISA and may contribute £3,600 in the tax year (in 2011/12).