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Introduction to ISA

1. What is an ISA?

1. What is an ISA?

The Individual Savings Account was launched by the current government on 6th April1999, to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) introduced in the early 90s. The essential nature of all these plans is for the government to actively encourage saving by providing tax-free incentives.

An ISA is a tax-free wrapper, in which gains and income are not taxed. It is not in itself an investment. Within proscribed limits, it allows the saver to select which type of saving to undertake.

With capital gains tax and income tax rates of up to 40%, the privilege of ISA saving not being taxed is also restricted to annual limits on the amounts that can be invested. Within the limits, the choice is that of the saver.

The eventual use of the savings is also at the saver’s choice and partial or total reclaims from an ISA can be made at any time, without penalty and without tax arising.

However, once realised, the amount of any withdrawal cannot be put back into the same ISA; the ISA rules always restrict contributions to annual limits.

The government is committed to keeping ISAs in existence for 10 years, ie to 2009. Thus the format encourages long-term financial planning, safe in the knowledge that the account will remain essentially unaltered over that time-span.

Investment and life assurance ISAs should be viewed as long term savings plans (say five years or more) and the value of any investments may fall as well as rise.

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