Individual Savings Accounts, or ISAs, are tax-free vehicles that the government provides to citizens of the UK who are at least 18 years of age. Their goal is to help you to save money with conservative or aggressive investments.
How to Compare ISA Types
An ISA can have two components - a cash component and/or a stocks and shares component.
A cash component is similar to a regular savings account except it enjoys tax-free status. You can invest up to up to 3,600 GBP of your total ISA yearly subscription of 7,200 GBP into a cash ISA.
When you compare an ISA to a regular savings account, a cash ISA offers a higher interest rate because the banks are presenting preferential rates to their customers in order to motivate them invest in this tax-free scheme.
On the other hand, if you are comfortable with a bit more risk and the potential for more substantial growth, you can invest up to the entire 7,200 GBP limit in the stocks and shares component of your ISA. And your gains will not be taxed.
What are the best ISAs for you?
When it comes time to compare ISA accounts, there is no universally correct answer as to what is the best ISA. It is your hard-earned money that you are investing and it should be invested in accordance with your aversion to risk.
Here are some guidelines you might consider:
Are You Financially Conservative?
If you are financially conservative a fixed rate ISA may be the best ISA for you because fixed ISA rates are locked in for periods of 1, 3, or 5 years and can provide you with a well defined, stable income.
Consider, though, that should higher interest ISAs become available and you opt to withdraw or transfer your funds from a fixed rate ISA you will incur a penalty in terms of a loss of interest.
Are You Only a Bit More Middle-of-the Road as Far as Investments?
Again, a cash ISA may be the best ISA for you. However, if you are optimistic about economic prosperity in the near future or believe that inflation will rise, you may want to invest in a variable rate cash ISA rather than a fixed rate cash ISA.
Your variable rate ISA will increase in value if prices rise quickly and the Bank of England attempts to stifle consumer spending by raising interest rates.
Are You Are a More Adventuresome Investor?
If conservative investments are not your style then you should consider stocks and shares ISAs as your best ISA.
On the positive side, your shares ISA will be invested in the stock market and your gains will not be taxed.
However, especially in the short term, your capital will be exposed to the vagaries of the market. It will inevitably go up and down.
But, like all stock market investments, if you consider your stock and shares ISA as a long term investment, it could be one of the best ISAs for you.
As far as growth potential, should the value of your shares increase substantially, then when you compare ISA accounts, this component can substantially outpace virtually any cash ISA.
And to find out more about the best ISAs go to http://www.fidelity.co.uk/direct/research/fundsupermarket/fundsnetwork/isa-zone.html
Wendy Moyer is a professional writer.
