What is an ISA?
An ISA (Individual Savings Account) is effectively like any other savings account, only it comes with an annual savings limit, the interest you earn up to this being paid tax-free.
Stocks and shares ISAs are free from capital gains tax on any profits when you come to sell.
In the current 2019/20 tax year, you can save up to £20,000 into an ISA.
Thanks to an overhaul of ISAs in 2014, you can now hold as much as you like of this ISA limit in cash. Previously you could only put a maximum of half of your annual ISA allowance into cash, while the whole amount could be invested in stocks and shares.
This is great news for savers who prefer to steer clear of the stock market.
Savers can also now switch freely from cash to stocks and shares and vice versa, giving you greater control over your savings. Under the old ISA regime, you could only transfer money from cash to stocks and shares, not the other way round.
And since April 2016, if you hold cash in an either an investment, cash, or innovative finance ISA, you can take this cash out of your account and put it back in within the same tax year without this affecting your annual allowance. Not all ISA providers may offer this flexibility, so check with yours before withdrawing any money.
Savers can also now switch freely from cash to stocks and shares and vice versa, giving you greater control over your savings
You can switch your ISA if you are unhappy with its performance. You would have to transfer all the savings from the current tax year 6 (April, 2019 to 5 April, 2020), but you can split ISA contributions from previous tax years.
Note that you should never just withdraw money with the intention of putting it into a new plan. If you do, you will lose your tax-free status.
Instead, you need to notify your new provider of your intentions and let them take care of the transfer arrangements – which they will be more than happy to do.
Be aware though that if you haven’t paid into your ISA in a given tax year, your account may have ‘lapsed’. This means that although it is still earning interest, you won’t be able to transfer funds until you’ve contacted your provider, filled in a form and the account is made ‘live’ again.
Savers can now hold a broader range of investments in an ISA than they could previously.
Corporate bonds with less than five years until maturity were allowed into ISAs for the first time from 1 July, 2014. Bonds are essentially ‘IOUs’ from companies. Investors receive an annual return, plus the return of their original investment if they hold the bond until maturity.
You can also hold peer-to-peer loans within an ISA too, through new innovative finance ISAs, which came into effect on 6 April, 2016.
The allowance for Junior ISAs (JISAs) – which are tax-efficient savings plans for children under the age of 18 – is £4,368 in the 2019/20 tax year.
And savers between the ages of 16 and 18 will also get the £20,000 ISA allowance which they can invest in cash. This is important as you cannot open a stocks and shares ISA until you are 18.