An Individual Savings Account provides an investor with the opportunity to benefit from a tax-free savings. This means that they avoiding paying tax at the highest applicable rate. Each individual has the freedom to choose whether they wish to invest capital in a cash ISA or a stocks and shares ISA.
Individual Savings Account Investment Limits
Inland Revenue rules allow someone to invest up to £10,200 in a tax free savings account. An investor could choose to invest £5,100 into a cash ISA and £5,100 in a stocks and shares ISA. Alternatively, an investor could invest the full £10,200 in a stocks and shares ISA from April 6th 2010. With the exception of over-50's, the maximum investment is currently £7,200.
Cash ISA Vs Stocks and Shares ISA
Deciding which is preferable depends largely upon how long the investor can lock away their money and their risk profile. Most people instinctively know their risk tolerance. Financial institutions normally grade their investments as low, medium or high risk to assist potential investors with decision-making.
Are Stocks and Shares ISA a Long Term Investment?
Anyone seeking to invest should consider 5 years as a minimum investment term. This would usually mean that it wouldn't be suitable for someone who is dealing with financial uncertainty or for a first-time buyer seeking to buy their first home in a few years time.
Variable Rate Cash ISA Vs Fixed Rate ISA
A variable rate is the preferred option for those who don't have other savings and tend to get unexpected bills. It is most beneficial during times of economic prosperity and rising interest rates. A saver is able to withdraw their money at any time without penalty.
A fixed rate ISA investor enjoys the certainty of capital protection and a defined rate of interest for a set term. This makes it an excellent investment for those who require a certain income from their savings. If money is withdrawn before the end of the term it would result in an interest penalty being incurred.
Personal Risk Profile for Individual Savings Accounts
A cash ISA offers capital security, but more modest returns. A stocks and shares ISA provides greater investment potential, but doesn't normally protect the capital. However, some financial institutions offer investors a FTSE tracker ISA with capital protection, but also a cap on potential gains.
All investors have a different attitude towards risk so it is important to consider all options carefully before selecting an Individual Savings Account. Those with a lower risk profile should normally opt for a cash ISA or capital-protected FTSE tracker ISA. A stocks and shares ISA will be favoured by those with a greater risk tolerance who are seeking the potential for greater capital appreciation.
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