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Individual Savings Accounts (ISAs) offer investors a tax-free way to grow their money over the long-term. Investors choose cash ISAs akin to savings accounts or stocks and shares ISAs. Money can also be split between both options.

Cash ISAs

Cash ISAs are fundamentally like regular savings accounts, but the interest investors earn is tax-free. Currently, people under age 50 can save 3,600 per annum, but starting in 2010 everyone will be allowed 5,100 per annum. Most cash ISAs allow investors to instantly access their money and most provide a solid rate of return. There are those whose interest rates are low enough to make them unwise, however, so investors need to research the options.

Share ISAs

Share ISAs are tax-free accounts that hold shares, funds, and other stock-market-type investments. Investors are allowed to hold bonds and gilts and any interest earned is also tax-free. The ideal is to choose bonds issued by sound organisations that provide a decent rate of return and that have low fees. For the current year, those aged 18 years and older can invest up to 7,200, 3,600 of which may be invested in a cash ISA. Investors can also choose to invest the full 7,200 in a share ISA. Starting in April 2010, everyone will be able to invest up to 10,200 per annum, of which 5,100 may be placed in cash ISAs.

Given that everyone has a capital gains tax allowance, share ISAs may not be necessary if investors only want tax-free savings. The current allowance for capital gains is 10,200 per annum. That means investors can make a profit of up to this individual capital gains limit and not have to pay any tax on it.

Switching Between Cash and Share ISAs

Investors can transfer money from a cash ISA to a share ISA. The reverse is not true; investors are not allowed to transfer a share ISA to cash. This can prove problematic if the market is in freefall. In such a case, investors can open a self-select shares ISA and hold cash there, so long as the intention is to invest eventually. Investors will have to pay a tax of 20% on any interest earned. It's also difficult to find self-select ISAs that pay a decent return. It may be worthwhile, however, if investors need to shield their money in the short-term.

ISAs offer attractive saving options, but investors must do their research. If it seems too complex, independent financial advisers can help choose proper investments.

ISAs - probably the largest choice of ISAs in the UK!

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