subject: ISA popularity grows - Are you taking advantage? [print this page] ISA popularity grows - Are you taking advantage?
Having been introduced more than a decade ago, the individual savings account - more commonly known as the ISA - has become a popular way for people to save for the future.
Whether you have a specific savings target in mind, or are just putting together a rainy day fund, the tax efficiency an ISA can provide makes them a great option. In fact, they are already something that has very much crossed over into the mainstream.
Brought to the market to replace schemes like personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs), ISAs have clearly been taken to heart by the general public, as there are so many now in place. By the end of 2009 alone, it was estimated that there were well over 19 million ISA accounts that had been set up across the UK.
There are, however, still some common misconceptions about how Cash ISAs work. One of these is that they are only suitable for those looking at longer term investment. While it is true that there can be greater value in keeping your cash locked away for longer in an ISA, they are also a solid option if you have a shorter term savings goal. If you choose a fixed rate Cash ISA, for example, you can get a pretty accurate idea of what you might have available when it's term ends.
Once you've chosen between a fixed and variable rate, and are happy with the rate you've been offered you will be able to save up to a specific amount over the course of any one tax year. In 2010/11, this allowance was raised to 5,100, but the Government has since suggested this may increase year on year in line with the Retail Price Index. But the most notable thing about ISAs is the fact that you will not have to pay any tax on the interest you earn - making them significantly more attractive to some than a standard savings account.
The best way to make the most of your Cash ISA is to invest one lump sum as early as possible in the tax year, as this will mean you can start generating the maximum amount of tax-free interest sooner rather than later. However, you can also make any number of smaller payments up to the yearly limit. Once you've paid in up to this limit, you won't be able to replace any money you withdraw, but as you can pay into it in a way that suits you, you should find it is flexible enough to meet your needs.
