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What is an ISA?

An Individual Savings Account ISA is a way to save money without paying any tax on the interest, the gains, or the growth; unlike a regular bank account or general investment account.

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There are 2 main types of ISA available to adults in the UK – Cash ISA and Stocks & Shares ISAs.  

Applicable for: UK residents

Annual allowance: £20,000 per tax year

A cash ISA, like the name suggests, holds your money effectively in a bank account and you benefit from the interest rate applicable. 

A stocks & shares ISA on the other hand, provides the opportunity to invest in the stock market.  Here the gains can be significant, but you may also suffer losses depending on the underlying performance of the investment held meaning this is a riskier option than a cash ISA.

With regards to investment term, cash ISAs currently offer very low interest rates and therefore may not be suitable for the longer-term investor.  However, should you think you may need access to your savings within a few years of investing, the lack of fluctuation may be more suitable.

Stocks & Shares ISAs are more suitable for a long-term investor, perhaps 5 years or more.  This will generally allow short term ups and downs to iron out and tend to lead to longer term gains.  It would be unlikely that you would see suitability in taking a Stocks & Shares ISA if there is a clear need for the funds in a couple of years.