For most of us the easiest and most accessible way to save is via an individual savings account – also known as an ISA. As the new tax year begins we show you how to pick the best ones.
What is an ISA?
An ISA is tax-free savings account which can invest in cash or stocks and shares.
You can invest up to £5,640 in a cash ISA or £11,280 in a stocks and shares ISA.
The total ISA allowance for the tax year starting 6 April 2012 and ending 5 April 2013 is £11,280, so if you use up your full cash allowance you can put in a further £5,640 into a stocks and shares ISA. Or you can put the whole £11,280 into stocks and shares.
With a cash ISA you are lending your money to the bank, whereas with a stocks and shares ISA the bank is investing it in companies on your behalf, via shares and other stock market products such as bonds.
Tax free savings
With an ISA you don’t pay tax on the interest you earn and you don’t pay capital gains tax on any money you take out.
How cash ISAs work
Cash ISAs pay a fixed rate of interest for a set period of time, but interest rates can still go up or down.
So even if you are already invested in one you need to keep an eye on the rate you are being paid.
Cash ISAs will also come with opening bonuses, which means you get paid a higher rate of interest for an initial period, often the first year.
Cash ISAs are sold by banks and building societies and they operate the same way as a simple savings account – you may even get a cash card to make withdrawals.
You can compare the best cash ISA rates on independent comparison sites to make sure you’re getting the best rate.
How stocks and shares ISAs work
Banks and building societies also sell stocks and shares ISAs. But the money you earn will depend on how well the shares you are invested in perform.
The majority or packaged stocks and shares ISAs will invest in UK companies, however you can choose an ISA which invests in emerging markets or the US. You can even lend your ISA savings to companies needing to borrow money – via corporate bonds.
It depends how much you can afford to risk your savings: the more risk the more chance you have to make money but also to lose it – this is known as the risk/reward dilemma.
A stocks and shares ISA needs to be left alone to grow for at least three years, but similar to a cash ISA you need to keep an eye on your stocks and shares investment and be prepared to move your money if you are worried.
If you are considering a stocks and shares ISA you may be best off taking independent financial advice, especially if you’ve never bought shares before.
Invest on your own
Some people choose to buy shares themselves and then put them in an ISA, rather than buy a packaged stocks and shares ISA.
You can go to a fund supermarket or share dealing website and choose your own shares, for which you will pay a fee known as a bid offer spread.
Most experts recommend having a stock market for longer-term savings such as a pension and keeping your cash ISA as a rainy-day fund.
And if you don’t earn a salary but you have a partner who does, they can put money into an ISA on your behalf.