The Individual Savings Account was introduced by the government in 1999 as an incentive for people to save with a favourable tax status. It is a financial product that allows people to save a specified amount of money, known as the ISA allowance, without paying income or capital gains tax on their returns.
ISA accounts were introduced to make saving money easy; their advantage over traditional savings accounts is clear, because the returns you make on the money you initially invested are protected from taxation.
The launch of the ISA
When the ISA was proposed by former Chancellor Gordon Brown in his Budget speech back in April 1999, the plans were met with groans and widespread scepticism. This was largely due to the extent of the proposed tax-free allowance, which was lower than previous schemes, including the TESSA (Tax Exempt Special Savings Account) and PEP (Personal Equity Plan). The ISA, in its early life, was also a more complex product than it is today, with various options including maxi and mini ISAs, making saving something of a minefield for the less informed investor. The key element that every investor needs to be mindful of is the eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.
Initial scepticism about the ISA was largely cast aside when those who rushed to invest their tax free allowance in technology industry shares sat back and watched the money roll in, largely thanks to the boom in technological products in 1999 and 2000. The ISA was also plugged by many financial institutions, with branch windows adorned with ISA-related slogans and posters clarifying the ISA saving scheme, encouraging people to make the most of their allowance before the financial year end on 5th April. As we have seen from the technology boom, the value of investments can go down as well as up and you may get back less than you invested.
The impact of the recession and modern ISAs
The global recession made it more difficult to save money. When interest rates fell, people who had previously relied on their savings were forced to tighten their belts. While those without any savings found they had less disposable income and therefore less money to put away.
Although financial uncertainty continues, ISA popularity remains. Interest rates on savings accounts and ISAs are relatively low at present, but the ISA wins over the traditional savings account due to the product’s inherent tax efficiency. So an ISA is an easy choice for anyone who is interested in investing in shares or has cash to save. The ISA, in its most basic form, acts in a similar way as a savings account, but the money you make from interest is solely yours and you will not lose a chunk of your hard-earned cash to the tax man.
The modern ISA is also a much simpler product than the original model; gone are the days of splitting your money between mini and maxi ISAs. In their place is a straightforward arrangement, which allows you to save a sum of cash or invest in stocks and shares according to the ISA allowance. This is the limit you can save; the ISA allowance 2011 stands at £10,680, with a maximum cash investment of £5,340. You can use the allowance in three different ways, which includes using the maximum cash investment of £5,340, mixing cash and stocks and shares to the value of £10,680 (with a maximum cash investment of £5,340) or investing the full £10,680 in stocks and shares.
The government has confirmed the introduction of Junior ISAs, which are designed to replace the Child Trust Fund. These will allow parents to save money for their children’s future.
The ISA, despite its uncertain beginnings, has come a long way and many people consider it a very important financial product. The ISA presents clear tax advantages over a traditional savings account. If you have cash to save, it could be worth investigating ISAs and shopping around for the account that best suits your needs and preferences.