What Are the Basic Differences Between Cash ISAs and Share ISAs Article

What Are Cash ISAs

Cash ISAs are basically savings accounts. You place money into this type of account and you earn interest on it. The primary difference between an ISA and an ordinary savings account is that your interest earnings are free from tax.

Currently, individuals 16 years of age and older can save as much as ?3,600 in a cash Individual Savings Account for the 2009/2010 tax year. For UK residents 50 years of age and older, this amount is ?5,100. Once April 2010 arrives, all individuals 16 years of age and older will also be able to save ?5,100 in a cash Individual Savings Account.

As with most financial products, cash ISAs are available with different options and a variety of interest rates. Since some of the interest rates are better than others, shopping around for the best ISA interest rate is a wise idea. Since the options that providers offer vary, it is important to ask questions or read up on these prior to placing your money into a cash ISA.

One important option that is sometimes available involves the transfer of money from one ISA account to another. Some providers allow a transfer between cash ISAs in order to obtain a better interest rate. This is done without affecting the annual allowance permitted by law to retain the tax free status.

What Are Stock and Share ISAs

Stock and Share ISAs are investment accounts. With this type of ISA, individuals hold shares and funds of a stock market nature. This type of investment is allowed to grow free of tax similarly to the Cash ISAs. The primary goal with Stock and Share ISAs is to invest your money in funds that carry low risks but high returns.

In general, government bonds or gilts are a good investment, paying a fixed rate of interest that is free of tax when incorporated into an ISA. Corporate bonds provide another sound investment provided the company is financially sound. Typically, the company has a pre-established date when your money will be returned to the investor.

The investment amounts for Stock and Share ISAs is different than that given to cash investors. Currently, individuals 18 years of age and older can save as much as ?7,200 in a Stock and Share Individual Savings Account for the 2009/2010 tax year. For UK residents 50 years of age and older as of October, this amount is ?10,200. Once April 2010 arrives, all individuals 18 years of age and older will also be able to invest ?10,200 in a Stock and Share Individual Savings Account.

Of course, investors can choose to split their money between Cash ISAs and Stock and Share ISAs. The values for the cash ISAs are ?3,600/?5,100 respectively per legal guidelines. These amounts would be deducted from the total allowable amount of ?7,200/?10,200 respectively.

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

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