The UK government has recently introduced the Individual Savings Account (ISA) to help people save for their future. This new vehicle replaced the existing PEP and TESSA schemes. The PEP (Personal Equity Plan) and TESSA (Tax Exempt Special Savings Account) schemes have been closed as of April 1999.
The ISA is a tax-free savings scheme. In effect it is a savings account like one you would have at your building society or bank. The big difference is that the ISA account is tax-free. That means any dividends or interest you earn on an ISA account is not subject to income tax and the money can keep growing in a tax-free manner.
The ISA scheme was introduced in 1999 and is expected to run for at least 10 years. Initially, you can save up to £7,000 a year until 2005/2006 and then £5,000 a year for 2006/2007. And the beauty is that you can withdraw the money at any time, you have total flexibility.
It is easy to open an ISA account. The ISA accounts are managed by building societies, banks, insurance companies, national savings and the list goes on and on. The ISA account comes in three different choices or components: cash savings, stocks and shares and life insurance policies.
Cash savings basically allows you access to your money any time and can be an investment for the short-term or long-term. Stocks and shares are only suitable for investors who can keep their money in the ISA for some period of time, such as five years. Since you will be investing in stocks and shares, your investment can go up or down. The life insurance policy is a long-term investment tool that also provides pay-outs if you die. Again, the value of your life insurance policy can go up or down.
Practically anyone can open an ISA. You just have to be over 18 years of age and reside in the UK. However, ISAs are not available as joint accounts and cannot be opened for someone else.