ISAs: get to grips with the basics

ISAs explained

An ISA, or Individual Savings Account to give it its full name is simply a savings or investment account which won't incur income tax or capital gains tax on the interest or investment returns. A stocks and shares ISA allows you to invest in a tax efficient way in a wide range of investments.

There are two main types types of ISA: a stocks and shares ISA you can invest through and a cash ISA for bank account type savings. This information is based on our current understanding of tax rules and these are subject to change.

Using your ISA allowance - your choices:

You can put the whole of your allowance (£15,240) into a cash ISA in the 2016/2017 tax year

You can put the whole of your allowance (£15,240) into a stocks and shares ISA in the 2016/2017 tax year

You can 'mix and match' and transfer money between the types. However, you can only contribute into one of each type of ISA per tax year.

Of course, you don't have to use the full amount of your ISA allowance – it's only a maximum amount. The minimum amount you can put in an ISA varies from one provider to another. You can also choose ISAs which allow you to pay in regularly if you don't want to pay in a lump sum.

What are the main types of ISA?

Cash ISAs

  • Save without paying tax on any interest earned
  • Many offer easy access to your money – useful for short term savings
  • Note that inflation reduces the buying power of money
  • Various accounts are available - for example, you could set up an instant access account so you could have your money as and when you need it; or a fixed term account which could enable you to achieve greater returns.

Stocks and shares ISAs

  • A tax efficient way of investing your money.
  • You may be able to invest in funds, gilts and shares, all within the same ISA. Investments such as these are generally considered medium to long term options, say 5 years or more.
  • Depending on the type of investments you choose, the value of your investment could go up and down and may be worth less than you have paid in.

How do ISAs work?

  • You will get a new allowance each tax year and you can't carry over any unused portion of your ISA allowance into the next tax year.
  • You can pay into an ISA every tax year and as long as you keep your money within the ISA you'll still benefit from the tax-efficiency.
  • If your provider allows, you can now withdraw money from an ISA and pay it back in again without affecting your £15,240 allowance. You just need to make sure that any money you withdraw is paid back in during the same tax year.
  • You can choose to transfer an ISA to another provider. Some providers may charge for this. The nature of a cash ISA and a stocks and shares ISA is different, so if you are moving from a cash ISA you need to understand the differences between the two types of ISA, in particular that with a stocks and shares ISA the value of your investment will go up and down and you may get back less than you invested.
  • You could use an ISA to provide you with an income.
  • The government have introduced a 'Help to Buy ISA' whereby first time buyers will receive a £50 bonus for each £200 they save, up to a maximum bonus of £3000. This is a Cash ISA only and gets rewarded when you buy your first home, using the Cash ISA as all or part of the deposit. We currently do not offer a 'Help to Buy ISA'.

Find out more about Aviva's ISA

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