What are ISAs?

One way of saving that attracts tax benefits (as do pensions) is to take out an ISA. ISA stands for Individual Savings Account, but they are usually called ISAs to rhyme (almost) with Tizer.

They also have some advantages over pension savings schemes:

• You can get at the money before you retire if you need it.
• You can take all the money out as a lump sum, or series of lump sums, if you wish. You do not have to use any of the money to buy an annuity.

and some disadvantages:

• If you ever need to claim means-tested benefits, money held in an ISA will count against the money you will receive.
• While ISAs do get tax benefits, the treatment of lump sums taken from a pension scheme is more favourable.
• In more general terms the tax benefits are about the same if you expect to pay the same rate of tax when you retire as you do now. If, however, you are paying tax at a higher rate now, but do not expect to when you retire, then pension schemes will be a better tax deal.

It makes sense to have some emergency, rainy day, money that you can get at before you tie money up in pension schemes. Some experts suggest that three months' salary is a good rule of thumb, but you may think that you need more or less than this. A cash ISA makes a sensible home for an emergency fund.

There are different kinds of ISAs, and there are rules about how much you can invest each tax year (April to March).

Either you can take out three mini ISAs in a tax year and save up to:

• £3,000 in a mini cash ISA (this is like a standard bank or building society savings account, but with added tax relief on the interest)
• £3,000 in a stocks and shares mini ISA (this is invested on the stock market and means that your investment can fall as well as rise)
• £1,000 in an insurance mini-ISA (savings linked to life insurance)

Your mini ISAs can be with different suppliers, so you can shop around.

Or you can take out one maxi ISA (through a single supplier). This can invest no more than £3,000 in a cash component and no more than £1,000 in insurance-linked savings, but can invest up to £7,000 in stock and shares. Normally maxi ISAs are a route to invest in stocks and shares.

You can find out more about ISAs from the tax authorities or the Fincancial Services Authority.