It doesn’t matter whether you are saving for a wedding, university fees or your pension pot, an ISA is one of the most tax-efficient ways to store your hard-earned cash. Kevin Mountford, head of banking at moneysupermarket.com, highlights the fact that ‘If the credit crunch has taught everyone, and every bank, one important lesson, it is that savings are important.’

The reason that so many investors have an ISA is that it is a tax-efficient wrapper in
which you can hold either stock marketbased investments or a traditional savings account. Arguably the main attraction of taking out an ISA is that the proceeds are tax free. Investments held within an ISA are not liable for capital gains tax, nor do any
dividends you receive from them have to appear on your income tax form.

Each tax year (6 April to 5 April) you can save up to £7,200 in a stocks and shares ISA,
which includes individual equities, unit trusts, investment trusts and open-ended investment companies, or £3,600 in a cash ISA.

Making the right choice
It is very important when choosing which form of ISA to put your money into that you
know what to expect. A cash ISA allows you to put away your money to accrue interest
just like it would in an ordinary bank or building society account, but with the advantage of it being tax-free. On the other hand, a shares ISA invests in the stock market so, although any gains the money makes will not be taxed, the capital will also be exposed to the ups and downs associated with stocks.

If you are investing in an ISA for the first time, there are a number of things you will need to consider. Ben Yearsley, investment manager at Hargreaves Lansdown, points out, ‘Investment choice is number one, and not just when you first invest, but afterwards as well. Things change, companies go off the boil and new opportunities always arise.

‘Accessibility is also key,’ adds Yearsley. ‘Investment freedom means nothing unless
you can take advantage of that choice.’

Ian Bennings, product development manager at The Share Centre, agrees: ‘It is important to do your research and look at what all the different providers offer. If you
can set up a practice account to see how their system works then do so and see if they are easily accessible and if the information they provide is sufficient.’

Getting started
Over the past few years, the ISA market has changed dramatically and nowadays almost every provider offers online access. Products available solely via the internet often have better rates and lower charges.

But Bennings suggests that you shouldn’t just opt for the provider with the lowest charges: ‘When it comes to choosing an ISA manager, it’s a bit like choosing a bank. Every bank is more or less the same, but it is the extra bits that make it the right one for you, so it is important to investigate what tools the provider is offering. Look for an easy-to-use website,good knowledgeable, friendly staff and working hours that suit you.’

He adds, ‘The Share Centre, for example, despite being an execution-only broker, has a team of advisers on hand if investors are thinking about buying a particular stock.’

There are several ways in which you can start your ISA saving, either by going direct
through an ISA provider such as a fund management house, bank or building society,
or via an independent financial adviser (IFA) or stockbroker.

If you opt for the latter, the manager can provide you with advice as to when and where your money will be best held, or, more frequently, will provide some form of managed portfolio. In most cases, these will be discretionary – i.e. the manager will invest in line with a strategy that you have determined but the actual investment selection will be up to them.

Cutting the costs
But remember that IFAs and stockbrokers charge a fee for these extra services, and these costs should also be taken into consideration.

Sherry-Ann Sweeting, marketing manager at SIT Savings, explains, ‘Our research has
shown that, along with fund performance, charges rank at the top of investors’ criteria
when choosing an investment product. We all know that past performance is not a guide to the future, and market movements are something investors have no control over. But
charges can be as material to returns from an investment as the performance of the fund, and they are something the investor does have control over in their selection of product or provider. Therefore, it is very important for investors to consider charges when selecting their investments.’

She adds, ‘The detrimental effects of high charges are even more noticeable in times of
difficult market conditions. Investors with large ISA investments can make sizeable
savings in charges by choosing their ISA provider carefully, paying particular attention to whether the charges are percentage based or a fixed rate or capped charge.’

Cash under pressure
When looking at cash-based investments, the interest rate should also be a key selection criterion when it comes to pinning down the perfect provider, and it is important to shop around because the rates offered vary dramatically from one provider to the next.

Unfortunately, since the credit crunch took hold in the UK and the government began
slashing the base rate, ISA rates being offered have plummeted from the highs we have been used to.

Halifax’s popular ISA Saver is now paying just 0.1 per cent on balances of up to £3,000, giving just £1 interest per year on every £1,000, and towards the end of 2008 Abbey also cut its rates and now pays between 0.56 per cent and 1.9 per cent on its branchbased
Easy ISA.

‘With rates on cash ISAs as low as 0.2 per cent in one instance, it makes sense to check
that your current deal is still competitive,’ warns David Black of research firm Defaqto.

Easy access
Once you have invested in an ISA, whether it be cash or stocks and shares, your money
is not locked away – you can make withdrawals if necessary. You should, however, bear in mind that you use up a portion of your annual allowance for that tax year when you take money out.

ISAs should be at the top of the list for any saver. Ian Bennings explains: ‘Anyone who works and pays tax should look to a cash ISA as their first port of call so that they can build up that emergency fund.

‘For those investing for the long term, such as saving for a deposit on a house or a
holiday, a stocks and shares ISA will hopefully provide a better return.’

But he also points out that, particularly in this extremely volatile period, it is important to review your ISA to ensure you are making the most of your money. Bennings concludes, ‘People seem to buy a stocks and shares ISA but then forget about it and don’t realise that they can trade within it. You should look at it as you would any other investment and review it, if possible, on a weekly basis, particularly in the current economic environment.
‘Shares aren’t for life, and they are there to be actively managed.’