Belfast Telegraph

Thursday 25 December 2014

Choosing the right ISA for your hard earned savings

Claire Geddis
Claire Geddis

Question: My business is currently doing well, and I would like to start saving in an ISA. What’s the difference between cash ISAs and investment ISAs?

Claire Geddis, partner with S Hill & Co Investment Advisors, replies:

An ISA is a tax-efficient Individual Savings Account, which was introduced by the Government in 1997 to replace the former PEP and TESSA accounts.

There are two different types of ISA available to savers in the UK — a cash ISA or an |investment ISA. In total, an investor can |save a maximum of £10,200 for the 2010/11 |tax year.

An investment ISA is invested in funds such as unit trusts ranging from very low risk cash funds to stock market-linked funds, and you can invest the full ISA annual allowance of £10,200.

A cash ISA is basically a deposit account that earns interest tax-free, and you can invest up to half the total ISA allowance for 2010/11 of £5,000.

However, current low interest rates on ISAs and all types of savings accounts are not even |offering savers a return on the current RPI (retail prices index) rate of inflation, which had reached 5.3%. Savers are now looking for a better return on their savings — and quite rightly so, as there is currently no savings account or cash ISA offered by banks or building societies that are offering a return on the current RPI rate of inflation.

Saving in an investment ISA — which should be viewed as a medium to long-term investment — could ultimately bring you a higher return than a current cash ISA or savings accounts, as the return is linked in part to stock market performance. But the growth will also fluctuate depending on the performance of these funds.

However, depending on your attitude to risk, recent changes to ISA transfer rules means it is now possible to quite easily transfer your cash ISA into an investment ISA, and that is certainly something that all ISA investors should consider.

Like cash ISAs, nearly all investment ISAs offer instant access at any time, and it is always a comfort for savers to know that they can withdraw money when they need it.

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