The Cash Individual Savings Account (ISA) has been around for over ten years now, and has changed quite a lot since. The ISA was introduced to replace the Tax-Exempt Special Savings Accounts (TESSAs) and the Personal Equity Plans (PEPs) which had been around before that.
The problem with PEPs and TESSAs was that only the more affluent customers tended to understand how they worked, and the accounts weren’t very accessible for the rest of the population.
The ISA was born in April 1999, and was immediately accessible to the entire population, being a simple and straightforward way of allowing everyone to save tax-efficiently.
ISAs must in nearly all circumstances be funded with hard cash, and only a few employee share ownership schemes allow saving without investing cash first.
Cash ISAs are available to anyone aged 16 and over in the UK, while Stocks and Shares ISAs are available to anyone aged 18 and over.
The Cash ISA works by simply investing cash into a savings account, which is the same as any other standard savings account, but with interest paid tax-free.
You can take out a Cash ISA whenever you want, but how much you can put in each year is subject to government limits. These used to be £3,000 a year, but have increased in the last few years, with the Cash ISA limit for 2011/12 at £5,340.
The amount of money you can save by having a Cash ISA over any standard saving account depends on how much you have invested, and the interest rate.
Someone earning 3% on £1,000 will get £30 interest for the year, which when taxed would lead to them losing £6, so an ISA may not be worthwhile.
However, someone who has saved the full limit for the lifetime of their ISA could have over £50,000, which at 5% interest could earn them £500 – which they would normally stand to lose £100 of to the taxman – so a Cash ISA is a good place to lock away their money.