Individual Savings Accounts

Everyone likes to save money and keep as much away from the taxman as possible, so individual savings accounts are a popular option in Britain. It’s ISA season where banks and other ISA companies dangle great deals and better interest rates in an attempt to woo us to their stock or cash ISA.

At its heart, an ISA is simply a savings account where the interest accrued is not able to be taxed. In a traditional account, the interest is taxed at about 20 percent and higher for those with bigger pockets.

There are two primary types of  individual savings accounts : cash and stock and shares.

 Stocks and Shares ISAs

Stocks and shares ISAs have an element of risk associated with them because like any investment, you don’t know how it will do in the future. You simply purchase stocks and shares in a company and the value of the stock grows with the company. Conversely, the value of the stock decreases if the company fails.

If you choose a stocks and shares ISA, try and diversify your portfolio so that you can have a buffer if one company doesn’t perform well. Stocks and shares ISAs have the most opportunity for growth, but also the biggest loss potential as well.

Cash ISAs

You can’t get much simpler than a cash ISA. It’s no different than your standard savings account. You agree to put in a set amount of money and earn a small amount of interest for it. If you need a safe place to put your money for a year or two and don’t want to worry about losing it, then a cash ISA is for you.

What ISA Season Means To Me

You can only open up one cash ISA and one stocks and shares ISA per year, so when ISA season comes around banks and other companies want your choice to be them. If you plan on using a stocks and shares ISAs, then look for companies that have done well in the past and remained steady. Segregate a portion of your ISA for companies that traditionally perform well and pepper in a few risky stocks that might get your real gain. This way if the risky stocks underperform, then you still have the other stocks to shore up your portfolio.

You should also take the opportunity to use this years ISA allowance, the earlier the better. You will get more interest if you use this year’s ISA allowance early instead of later in the year.

How Much Can I Put into ISAs?

In the tax year which ended on 5 April 2012, you could put in up to £10,680 into ISAs (this amount generally increases each year). But, in 2011 you could only put put a maximum of £5,340 in a cash ISA and the remainder of the £10,680 into a stocks and shares ISA with either the same or a different provider.  HM Revenue & Customs gives the following possible examples:

• £5,340 into a cash ISA and £5,340 into a stocks and shares ISA
• £3,000 into a cash ISA and £7,680 into a stocks and shares ISA
• nothing to a cash ISA and £10,680 to a stocks and shares ISA

For 2012/2013 the limit has increased to £11,280 with up to £5,640 in a cash ISA.

Options Outside the UK

If you are looking for a similar investment in the United States, the closest is an IRA but unfortunately it comes with quite a few more restrictions especially that you have penalties for withdrawal before retirement. ISA accounts allow you put money into them for safe keeping, and are more suitable for shorter term savings. In the US you can avoid Federal Taxes on the gains (but not on the initial investment) by investing in Municipal Bonds although they may still be taxable at the state level.

In Canada there is the Tax Free Savings Account (TFSA), which is similar to the ISA. It has no tax on income generated in the account, and tax-free withdrawals are permitted at any time.