ISA GUIDE: ISAs (individual savings accounts) are a tax-free way of saving. This guide to ISAs looks at what ISAs are, how to buy ISAs and how to select ISAs. We name intermediaries who sell ISAs at low cost or commission free and we look at the main types of ISA. Overall, the aim of this guide is to help you choose the very best ISA.

ISAs are dead simple if you think of them as a tax-free wrapper or envelope into which you can put up to £7,000 a year. There are two types of ISA, cash ISA and stocks and shares ISA. Concerned about the levels of charges and risks in some ISAs, the government has come up with what it terms stakeholder ISAs – these are simply cash and stocks and shares ISAs which meet certain government set standards. Also, you can choose a self-select ISA where you decide what investments go into the ISA envelope or you can buy a managed ISA where a bank or fund manager makes the investment.

The important thing to grasp, right at the start, is that, tax free status apart, what counts is how the underlying investment performs. If the shares you put into your ISA drop like a stone, then, never mind the tax benefits, the ISA will still have proved a poor investment. But ISAs do have big tax advantages – above all, profits are free from capital gains tax.

WHAT CAN YOU PUT INTO AN ISA?

You can put almost any investment generally available to normal investors into an ISA. This includes individual shares officially listed on any recognised exchange, qualifying investment trusts, unit trusts and other types of investment funds such as open ended investment companies (Oeics) and Ucits. You can also buy gilts, permanent interest bearing shares (PIBs), bonds, convertibles and preference shares, if they have at least five years to run when bought. Cash ISAs can include some National Savings & Investment products, bank and building society accounts and cash funds.

WHAT IS THE MAXIMUM INVESTMENT?

Up to £7,000 for 2006-07 for a maxi ISA, of which up to £3,000 can be in cash - if the ISA provider offers this facility. Otherwise it is up to £4,000 in a mini stocks and shares ISA and £3,000 in a mini cash ISA.

You cannot hold a maxi and a mini ISA in the same year, but as of 2008 this distinction disappears. You can invest on a regular monthly basis if the provider offers this facility. You can withdraw funds from your ISA at any time without penalty, but you can only reinvest if you have sufficient unused allowance for that tax year.