ISA guide: All you need to know to open an ISA

Kayla Kerr
on
Reading time: 3 minutes

This year, you can save or invest up to £15,240, and any returns you make will be free of capital gains tax. In this ISA guide we explain everything you need to know to make the most of your ISA tax benefits. 

pocket watch in hand

First things first, what is an ISA? ISA stands for Individual Savings Account. ISAs were introduced back in 1999 by the government. You are allowed to put a certain amount of money into an ISA each year and, for the whole time you keep it in an ISA, you’ll never have to pay tax on any capital gains you might make from it.

I’ve heard there are two types of ISA – is that right? Yes, that’s right. There are two types of ISA – a cash ISA and a stocks and shares ISA. A cash ISA is very much like a savings account with a high street bank. These accounts offer a rate of interest and all the tax benefits of an ISA. Nutmeg doesn’t offer cash ISAs. We offer the second type of ISA – a stocks and shares ISA. With a stocks and shares ISA, also known as an investment ISA, you can put your money into a wide range of investments – shares, bonds, commodities, and so on.

See what a stocks and shares ISA could be worth in years to come with our handy ISA calculator:

Try out our ISA calculator

First, enter your email address below.

How much can I put into an ISA? Your ISA allowance for the tax year from 6th April 2015 until 5th April 2016 is £15,240. You can decide to invest it all in a stocks and shares ISA, put it all into a Cash ISA, or any combination of the two.

What kind of returns can I get from a cash ISA? You usually get a low but fixed rate of interest. In November 2014, for example, the average cash ISA interest rate was 1.69% according to Bank of England figures. Unfortunately, that’s below inflation. In fact, many cash ISA holders have effectively seen the value of their savings drop in real terms over the past five years as interest rates have been so low.

And a stocks and shares ISA? An investment ISA carries risk, as with any investment, but offers the potential for far greater long-term returns than a cash ISA. Only maximum allowance cash ISAs that were opened in 1999 and 2000 have generated positive returns in today’s money, based on average interest rates. Cash ISAs opened in each of the 14 years since then have all fallen in value, in real terms, after accounting for inflation. Compare that to putting the same amounts into a medium-risk portfolio of stocks and shares each year instead. Your money would have gained in value every year but one, and would have done better than the cash ISA for each of the last 15 years, bar none – again, that’s in today’s money, after accounting for inflation.

New Cash v Equities illustration

However, returns are not fixed or guaranteed with an investment ISA. The actual returns you get will vary depending on the performance of the investments you have.

How do I open a Nutmeg ISA? First sign up and create a sample portfolio – it’s free and takes just a few minutes. Then follow the ISA set up process from the top left of your portfolio dashboard,. You can also transfer ISAs you may have with other providers into Nutmeg, all the while retaining their tax benefits. To do so, simply print and complete the ISA transfer form once you’ve set up your account.

If you’re looking for help in deciding whether to opt for a cash ISA or a stocks and shares ISA you might find our ISA forecaster tool helpful. 

————————————————————————-

Sources *Nutmeg calculations based on data from Bank of England, Macrobond AB.  Return on Cash ISA is calculated monthly using Bank of England data: Monthly interest rate of UK monetary financial institutions (excl. Central Bank) sterling cash ISA deposits from households (in percent) not seasonally adjusted (code: IUMWTIS) from April 1999 – Nov 2014; Monthly interest rate of UK monetary financial institutions (excl. Central Bank) sterling cash ISA deposits excluding unconditional bonuses from households (in percent) not seasonally adjusted (code: IUMB6VM) from Jan 2013-. The return on stocks & shares is calculated as the return of 60% invested in UK stocks (MSCI UK Net total return index) and 40% in UK government bonds (BoAML Gilts Total Return Index) less costs of 1.0% per annum. Inflation measure is the Retail Price Index (RPI-X). Assumes maximum cash ISA allowance invested each year.

————————————————————————-

Risk Warning: As with all investing, your capital is at risk. ISA rules apply.

Kayla Kerr

Kayla Kerr

Kayla Kerr writes on a variety of financial and lifestyle topics for Nutmegonomics. Kayla can be found on twitter @kaylasiobhan.

Other posts by