A Guide to Individual Savings Accounts (ISAs): How to Get Tax Free Interest from Cash ISAs and Stocks & Shares ISAs

With interest rates at an all time low, savers are finding it very difficult to get good interest rates. Therefore it is very important for everyone to make the most of the amount they are allowed to invest in an individual savings account or ISA. Here is a summary of the rules and limits for ISAs.

How Much Can I Invest in an ISA?

Currently a saver can invest a total of £7,200 in ISAs in each tax year, though this will go up to £10,200 for the over-fities from October 6th 2009. Of this, a maximum of £3,600 can go in a cash ISA, increasing to £5,100 for the over-fifties. The remainder must go in a stocks and shares ISA. Alternatively the whole amount can be invested in a stocks & shares ISA.

Over-fifties should be able to add more money to their cash ISAs from October 6th. However, some ISAs do not allow top-ups, and each person is only allowed one ISA product per year, so some older people may have to wait until the next tax year to take advantage of the higher limit.

The same applies to stocks & shares ISAs, but the UKs five largest fund managers have confirmed that they will be able to cope with the changes and that top-ups will be allowed.

What are the Best ISA Rates?

At present Leeds Building Society offers a five-year fixed-rate cash ISA at 4.05%, giving interest of £145.80 over 12 months for those investing the maximum mount.. However, many experts are not recommending these types of products, for they expect the bank rate to rise in the medium to term. The best easy access ISA is from Standard Life and pays 2.65%. However, rates do change, and new products are often appearing, so savers should keep an eye on what is happening.

Can I Move my Money Around?

If a cash ISA is no longer competitive, a saver can transfer it without losing the tax-free status. However, care is needed – savers should not close an existing ISA and then move the money, or they will lose the tax break. Therefore they must ensure that the current provider treats the transaction as a transfer rather than an account closure. Also, not all accounts accept transfers.

Savers can transfer a cash ISA into a stocks and shares ISA, but not the other way round.

However little a person has to save, an Individual Savings Account provides one of the best ways of getting a favourable rate of interest. It is recommended that everyone should have an ISA.