Individual Savings Account - a guide

You don't pay any personal income tax or capital gains tax on money held in an ISA.

There are currently two types of Individual Savings Account: a cash ISA and a stocks and shares ISA.

Each tax year you can have a cash ISA with one provider and a stocks and shares ISA with the same or a different provider. The value of tax savings and your eligibility to invest in Individual Savings Accounts will depend on individual circumstances and tax rules may change in future.

The annual investment allowance is £10,200 in this tax year (2010/11). Up to £5,100 of that allowance can be saved in cash with one provider. The remainder can be invested in a stocks and shares ISA with either the same or a different provider. If you have no cash ISA investment then you can invest up to £10,200 in a stocks and shares ISA.

On 6 April 2008 the Individual Savings Account rules were simplified and include the following changes:

• Mini and Maxi Individual Savings Accounts no longer exist.
• Individual Savings Account savers can instead invest in two separate Individual Savings Accounts each tax year, a cash ISA and a stocks and shares ISA.
• You can transfer any amount of savings in a cash ISA from previous tax years to your current tax year's stocks and shares ISA without it affecting your overall annual allowance. Your current Individual Savings Account Manager may charge you for any transfer. You may also lose out on any growth in value during the period where the transferring is taking place between your old Individual Savings Account Manager and your new Individual Savings Account Manager.
• Any money saved in a cash ISA in the current tax year can also be transferred to a stocks and shares ISA. If you do, you must transfer the whole amount.
• You cannot transfer a stocks and shares ISA into a cash ISA. You can however transfer your existing stocks and shares ISA into the stocks and shares ISA of another ISA manager.
• Mini cash ISAs, TESSA-only Individual Savings Accounts (TOISAs) and the cash component of a maxi ISA will automatically become cash ISAs.
• Mini stocks and shares ISAs and the stocks and shares component of a maxi ISA will automatically become stocks and shares ISAs.
• All Personal Equity Plans (PEPs) automatically became stocks and shares ISAs.

You must be at least age 16 to open a cash ISA and age 18 to have a stocks and shares ISA. You must also be resident in the UK for tax purposes. If you move abroad and are no longer a UK taxpayer, you can continue to hold any existing ISA, but you won't be able to pay more money into it.

Each tax year runs from 6 April to 5 April. You can invest at any time during this period. Most plans let you invest either as a lump sum or regular monthly amounts up to the subscription limits.

The cost depends on the provider and the type of Individual Savings Account you choose. There is normally no charge for a cash ISA, as the provider sets its interest rate at a level that covers the costs. With a stocks and shares ISA there is usually a set-up fee and an annual management charge.

Cost is not the only consideration when choosing your Individual Savings Account. You should also think about:

• Risk: Individual Savings Accounts offer a wide range of risk options, from cash ISAs, which carry minimal risk, to cautious managed funds that may be low to medium risk, right up to specialist equity funds that may be high risk
• Performance: investing in stocks and shares has the potential to give good rewards, but is riskier than cash, which has smaller potential rewards but tends to be more secure. This is a higher risk investment than a bank or building society. In a bank or building society your money is generally secure and readily accessible. Past performance is not a reliable indicator of future performance. The value of your investment may fluctuate and is therefore not guaranteed. You may not get back the full amount of your original investment.
• Timescale: generally an Individual Savings Account (certainly a stocks and shares ISA) should be thought of as a medium to long term investment. The longer you can invest for, the less worried you might be about the short-term ups and downs (volatility) of the underlying investments, because over the longer-term the assets are expected to produce positive returns.
• Accessibility: Prudential does not currently charge for taking money out of an Individual Savings Account but other companies may impose charges or other costs.

You can switch funds and providers although bear in mind that some companies may charge for this. Please note that Prudential does not currently charge for switching funds however our charges may vary in future.

When you die your Individual Savings Account investments and any income or growth stop being tax-efficient. The value of the investments in your Individual Savings Account is added to your estate and may be liable to Inheritance Tax.