An ISA, which is short for Individual Savings Account, is a method of savings that was introduced by the UK government in 1999. The aim is to help people save for both the short-term and long-term. The ISAs have replaced the existing PEP (Personal Equity Plan) and TESSA (Tax Exempt Special Savings Account) schemes, which are now closed.
What differentiates the ISA from other savings schemes from banks and building societies is that it is a tax-free scheme savings scheme. 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 UK government introduced the ISA scheme in April 1999 and it is expected to run for at least 10 years. Initially, you can save up to £7,000 a year until April 2006 and then £5,000 a year until April 2007.
Opening an ISA account is easy. They are available through a whole range of outlets, such as, but not limited to building societies, banks, insurance companies, national savings, supermarkets and the list goes on and on. You have three types of ISA account to choose from, which are called ‘components’: cash savings, stocks and shares and life insurance policies.
Cash savings is basically the same as any savings account you may have at a bank. It is flexible, you can withdraw money any time you want, but it still provides you tax-free growth. The second option is stocks and shares, which is only suitable for investors who can keep their money in the ISA for some period of time, such as five years. Due to the nature of the investment, 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.
ISAs are practically available to anyone that is over 18 years of age and resides in the UK. However, ISAs are not available as joint accounts and cannot be opened for someone else.