New to ISAs
Our simple guide will explain the basics of how to invest in ISAs, looking at the following:
- Understanding the basics
- Investing online – opening an account
- Choosing your investments
- Monitoring and building on your investments
ONe: Understanding the basics
What is an ISA?
Put simply, an ISA is an individual savings account that has special tax advantages. The ISA itself is simply a 'wrapper' (or container) within which you can hold shares, funds (unit trusts and OEICs) and cash investments.
ISAs are designed to be a flexible way of earning a tax-efficient return on your investments. Because they have special tax privileges there’s a limit to the amount you can invest annually in cash, shares, and/or funds.
Generally speaking, all the investments you hold inside a wrapper are treated in a particular way. So, if the wrapper has special tax advantages, all the investments inside it would share those tax advantages. (The same would apply to a pension wrapper, for example.)
So, when people talk about 'unwrapped' investments, they're referring to ordinary investments without any special tax treatment.
Please note tax treatment can depend on your individual circumstances, and may be subject to change.
What are the tax benefits of an ISA?
ISAs help you protect your investment returns from tax, particularly if you’re a higher rate tax payer. Although the exact rules around the tax benefits have changed over the years, this is how they stand for your 2011/12 allowance:
Capital gains tax
All your ISA investments are protected from capital gains tax. This can be particularly useful when you’ve built up a number of years' worth of ISA investments.
Income tax
You don’t have to pay further income tax on any income you make on your ISA investments.With cash ISAs, therefore, you don’t have to pay tax on any interest paid.
With shares or funds there’s actually no advantage to holding your investments within an ISA if you’re a standard rate taxpayer (as you don’t pay tax on dividends anyway). However, if you’re a higher rate tax payer you do get an extra tax advantage - as ordinarily you’d pay an additional tax on dividends.
If you think you might become a higher rate taxpayer in the future, it could make sense to invest in an ISA now to save your income in the future, when you become liable for the extra tax.
Another advantage of ISAs is they don’t need to be recorded on your tax returns.
When am I eligible to take out an ISA?
You must be 18 years or older to take out a stock and shares ISA, however 16 and 17 year olds can take out a cash ISA.
How much can I invest in my ISA?
Up until 5 April 2012 the ISA allowance for any eligible adult is £10,680. Except for a maximum investment threshold of £5,340 into a Cash ISA, the allowance is fully flexible. This means you can invest in either a Stocks and Shares ISA or a Cash ISA (or both). The following examples should clarify how much you can invest in both ISA components:
Example 1
If you want to be fully invested in the stockmarket, you can invest your full £10,680 allowance into a Stocks and Shares ISA.
Example 2
If you want to take full advantage of your Cash ISA limit, you can invest £5,340 into a Cash ISA and then choose to invest up to a further £5,340 into a Stocks and Shares ISA.
Example 3
The limits are flexible, subject to a maximum of £5,340 in the Cash ISA and £10,680 overall. So, you can invest, say, £7,000 into a Stocks and Shares ISA and put up to a further £3,680 into a Cash ISA – or any combination in between.
Annual allowances from 6 April 2012
From 6 April 2012 the annual ISA allowance will rise in line with inflation.
Two: opening an account
Investing online lets you take control of your investment portfolio. You can buy what suits you at a time and price you’re comfortable with. You can also research investments and buy online, all from the same place. It’s then easy to monitor and track your holdings so you can keep a check on how your investments are performing.
Opening an account is easy. Simply complete the application form (you will need bank and other details to hand) and apply online for your fully flexible Self Select ISA account.
For more information, and to apply Open an account
Which type of ISA might suit me?
Before you open an ISA account you need to know which type of investment you want to make. You can invest in shares and/or funds, or opt for a cash ISA.
You can also choose your investments (funds and/or shares) yourself, or opt for a ready-made selection of funds. To invest in your own selection of funds and/or shares you’ll need to ensure your ISA account provider offers a fully self-select ISA.
Find out more about the different types of ISAs below:
Funds ISA
With a Funds ISA you can invest up to £10,680 in funds (unit trusts and OIECs) within your ISA.
With Interactive Investor’s ISA account you can invest in funds and shares and hold cash.
Self-Select ISA
With a Self-Select ISA (also known as a Shares ISA or a Stocks and Shares ISA) you can invest up to £10,680 in your own choice of shares and/or funds.
Cash ISA
You can invest up to £5,340 in a cash ISA.
Cash ISAs can now be transferred into Stocks and Shares ISAs:
- All Cash ISAs can be transferred into Stocks and Shares ISAs. There’s a separate transfer form within your ISA account, if you’d like to do this.
- If you want to transfer Cash ISAs from previous years then you can choose to transfer some or all of the amount.
- If you want to transfer your Cash ISA from the current tax year, you must transfer the entire amount.
Find out more about Cash ISAs at Interactive Investor's sister site, Moneywise
Three: Choosing your investments
Choosing investments for your ISA is a very individual consideration. People have different ways of deciding where to put their money, from investing in a company you buy services from to the most impartial of analytical calculations.
Before you part with any money you need to work out what’s important to you. You’ll have to consider a number of factors, such as how much risk you want to take, which sector you want to invest in, how much you want to invest, and whether you’re looking for income or for capital growth. If you’re not sure about all or any of these things, we can help.
On Interactive Investor there are a number of ways to get help with which investments to choose, based on your own investment priorities. However, we’d always recommend you get independent financial advice to help with your investment decisions if you are unsure.
Here is how we can help:
1. Search - When you’re looking for a particular share or fund
If you know what you are looking for, or you’re interested in a particular fund, use our fund search tool to find funds quickly.
2. When you want help narrowing your options
If you find the amount of potential funds overwhelming, you can narrow your options by answering a few simple questions about your investment priorities (for example how much risk you want to take). You can then create a shortlist of options to research further.
3. When you're short on time, or want a ready-made selection of funds for an ISA
If you’re looking for funds for your ISA you might prefer the option of a 'ready-made' ISA where funds have been chosen using a set of carefully selected (and transparent) criteria. This can be particularly useful if time is running out at the end of the tax year. We offer seven ready-made fund selections - each made up of four top-performing funds.
4. Multi-fund ISA
If you’d like your investments to be managed for you by investment professionals, our Multi-fund ISA could be right for you. You can choose from three options with different risk profiles.
5. When the ISA deadline is near and you want more time to choose
If you’re looking for funds for your ISA and are fighting the ISA deadline (the tax year runs 6 April to 5 April annually) you can secure your annual allowance by opening an ISA account and depositing your money. You’re then free to choose your investments at your leisure.
6. Decide on real-time investing or regular investing
Do you want to make a one-off investment, or set up a regular investing schedule? Real-time investing lets you invest when the time is right for you. Whereas regular investing can be a flexible alternative and has the advantage of getting you into a regular investing habit.
Our regular investment services Portfolio Builder (for investing in shares) and Funds Builder (for investing in funds) gives you the flexibility to decide when, where, and how often you invest – with a minimum investment amount of £20.
Investment Ideas
We offer a range of tips, ideas and performance information to help you choose the right investment for you.
Trading Tools
We offer a range of helpful tools to assist you in narrowing down your investment options for your ISA.
four: Monitoring and building on your investments
Even with long-term investments it is important to keep a regular check on how they are performing. One of the easiest ways to do this is by setting up a portfolio, so you can log your investments and see their performance progress. A portfolio also lets you see everything in one place, giving you an overall snapshot view of all your investments.
It is also important to keep track of your fund details. For example, if the fund manager changes it might affect your view of the fund. You will find plenty of tools and information which will help you to monitor your shares and funds on our trading tools page.
Open an account
Please be aware of the risks involved. The price and value of investments and their income fluctuates and you may get back less than you invested. Past performance is no guarantee of future performance. If in any doubt, please consult a financial adviser. Tax treatment depends on your individual circumstances and may be subject to change.
