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What is an Individual Savings Account (ISA)?

The United Kingdom government introduced Individual Savings Accounts (ISAs) in 1999 to provide a system of tax-free saving for individuals. Every adult in the UK has an ISA allowance each year that is protected from tax liability Two main forms of ISA exist: Cash ISAs and Stocks and Shares ISAs. This article provides you with an overview of the Individual Savings Account (ISA).

Who provides ISAs?

Most banks and building societies in the UK offer ISAs to their customers. Investors should compare the latest deals to find the ISA which suit their needs. In addition, some financial advisers can provide tailor-made ISAs to fit in with a client’s particular requirements. All ISA managers must be authorised by the Financial Services Authority. Financial Services Compensation Scheme
The Financial Services Compensation Scheme protects funds held in a UK regulated bank or building society account. This means that the first £85,000 held by an individual is guaranteed against the failure of the financial institution.

Cash ISAs

Cash ISAs are straightforward tax-free savings accounts, and individuals are allowed to invest up to £5340 in ISA savings over the tax year 2011-2012 without paying tax. Most banks in the UK offer cash ISAs, with a variety of interest rates and access restrictions. Fixed-rate ISA
A Fixed-rate ISA provides a fixed rate of interest over a pre-determined period. The longer the period of investment, the better the interest rate. Variable-rate ISA Variable-rate ISAs vary according to the Bank of England base rate. Terms and conditions
It’s a good idea to check the terms and conditions when deciding which ISA to choose. Some require a minimum sum to be invested, while others limit withdrawals over the period of the investment.

Stocks and Shares ISAs

Stocks and Shares ISAs are preferred by savers who want to invest in the stock market while taking advantage of their tax-free entitlement. Stocks and shares ISAs are longer term investments and most providers recommend investing for at least five years to yield the greatest benefits. Index-tracker ISA
One of the cheapest options is an Index-tracker ISA: This follows the performance of a particular stock market, either in the UK or overseas. Actively Managed ISA
Alternatively, an Actively Managed ISA uses the services of a professional fund managers to monitor the markets and achieve maximum value. Final word It’s important to remember when saving and investing that the value of any investment may fall over a period of time.

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