What Are Individual Savings Accounts Article

The ISA has been around since 1999, and these vehicles were explicitly designed to have a broad appeal across many different ages and many different income groups. The Individual Savings Account contains two separate components, each with a different appeal and a different approach to saving and investing. The cash component of the ISA will be familiar to anyone who has ever held a bank account. The difference is that the money invested in this type of account enjoys favourable tax status.

The other component of the ISA is the stocks and shares portion. The money placed in this part of the investment is invested in qualifying investments, including stock market investments and public debt securities like government or corporate bonds. The stocks and shares portion may also contain cash, but that cash will be waiting to go into an investment.

Since these accounts are so flexible investors can make them as risky or as safe as they wish. Holders of Individual Savings Accounts are free to invest the stocks and shares portions of their accounts in any number of investment vehicles, from ultra-conservative government bonds to very risky investments like derivatives. This portion of the ISA can be self-managed, managed through a stock broker, or invested through a unit trust or investment trust. These collective investments pool the money of many investors to buy a more diversified mix of investments than each member could do on their own.

Any resident of the United Kingdom who is at least 18 years of age can open one Individual Savings Account, with both components provided by the same financial institution. Or if they wish those individuals can invest in two separate ?mini-ISAs?, with one mini-ISA holding the cash component and the other mini-ISA holding the stocks and shares portion. This strategy allows investors to hold their ISA with two different institutions. Residents who are between 16 and 18 years of age can open either a regular ISA or a mini-ISA, but they can use only the cash component. The amount of money that can be directed to an Individual Savings Account is fixed by law, and the amounts can be adjusted through legislation.

One of the best things about an Individual Savings Account is the favourable tax treatment given to the earnings. All income derived from the Individual Savings Account, including stock dividends, interest and capital gains, is tax free. This favourable tax treatment helps the account grow, while simplifying tax preparation for ISA holders.

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Kasandra Dunphe has been saving into an ISA for several years.

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