ISAs - Types of ISA available

We have already established that there are two different types of ISA account the Cash ISA and Stocks and Shares ISA. Within these categories, though, you are likely to encounter a varied range of products offering different types of investment and, in the case of Stocks and Shares ISAs, a widely differing degree of choice.

• Cash ISAs


On the cash side, you will find:

• Instant Access Cash ISAs

These allow you to pay in and with- draw money at any time. Some accounts will let you put in or take out any amount. Others may place annual limits on your withdrawals or demand minimum deposits.

Often such accounts have variable rates of interest, so you could end up receiving less income than you did when you opened the account (or more, of course, if the rate goes up).

Watch out for bonus rate deals –extra interest offered by providers to attract new clients. Any bonus rates should be payable for at least 12 months.

• Fixed-rate Cash ISAs


In taking out one of these ISAs, you agree to lock your money away for a set period – normally from one to five years. The reward for doing this is should be a higher rate of interest. The downside is that if you do need to access your money before the end of the fixed term, you may have to pay a penalty fee or lose interest.

A fixed-rate account offers you the benefit of certainty as you can be sure of the income your money will generate through- out its term. If interest rates do rise significantly though, you may regret being locked in.

Banks and building societies tend to respond to expected movements in interest rates when they set their own levels. If a five-year account is offering a seemingly attractive level of interest, it’s a fair bet that the institution expects market rates to rise above that level during the period. However, market forecasts can be wrong – witness the sudden and unexpected collapse in interest rates that occurred at the start of the global economic crisis.

It’s up to you whether you go for an instant access or fixed-rate ISA, but before you decide check out the best deals available via one of the comparison websites – these deals are not always the ones that get widely advertised. As well as the interest rates, bonuses, minimum deposits and any penalties, there are other considerations to ponder including whether interest is paid monthly or annually and how you can access the account – ie. at the branch, by post, by telephone or via the internet.

• Regular savings Cash ISAs


Not all of us have the money or the inclination to invest a large sum of money in one go. Putting a smaller amount into an ISA on a regular basis is a relatively painless way to save. Regular savings products offer a fixed level of interest over a certain period, typically one year, as long as you stick to a regular monthly contribution.

If you want to use your whole Cash ISA allowance of £5,100 in the current year, that would mean a maximum saving of £425 a month.

HMRC has confirmed that for tax year 2011-12, the overall ISA subscription limit will be £10,680. Of this, up to £5,340 will be allowed in a Cash ISA, which will mean a monthly limit of £445.

Note that withdrawals are not normally allowed for this type of product without incurring a penalty.

• Stocks and Shares ISAs


We have already seen that the range of investments that can be held in a Stocks and Shares ISA is fairly wide, but that is not the same as saying every Stocks and Shares ISA offers a full range of allowable investments. Products vary immensely, appealing to savers with different levels of investment knowledge and willingness to devote time towards investment decisions.

 • Fund ISAs


For the majority of savers, putting money into a Stocks and Shares ISA means investing in funds, mainly unit trusts or Oeics (open-ended investment companies).

The simplest and cheapest way to do this is via an index tracking fund, which delivers the performance of an index such as the FTSE All-Share. Or you can be more ambitious and look at funds covering different geographic sectors or types of investment and varying levels of risk.

Some providers offer only their own in-house funds, which may be all that you need. However, this can be limiting if you decide you want to seek better performance from another manager, as switching funds will involve an ISA transfer.

A number of fund supermarkets exist to help overcome this type of problem. They offer access to a wider range of funds, thousands in some cases, from a variety of fund managers and are often the cheapest way of investing, with lower initial charges than you might pay if you were to invest directly through the fund management company.

• Self-select ISAs


If you want to invest directly in shares and are confident of making your own buying and selling decisions, then you will probably be looking for a Self-select ISA, an account which allows you the freedom to choose stocks and shares as well as funds.

Many stockbrokers and investment management houses offer Self-select ISAs and provide varying levels of advice, from execution-only (no advice) up to a full discretionary service, where the broker makes all the investment decisions.

 Online execution-only accounts are the cheapest way to run a Self-select ISA and many of these help the investor by providing research resources such as market reports, news, share tips, charts and stock screening.

 

This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements.

The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance.

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