Individual Savings Accounts (ISAs)

Cash ISAs are just like a normal savings account, but with tax-free interest.

There's a wide range available, including easy access, notice and fixed rate accounts. The rates on offer tend to be more attractive than conventional savings accounts, but watch out for those that include an 'introductory bonus', as the rate will become less attractive in future.

Stocks & shares ISAs allow you to hold many types of investments within the wrapper, as follows:

• Shares and corporate bonds listed on a recognised stock exchange anywhere in the world.
• Gilts and similar securities issued by other governments in the European Economic Area (EEA).
• Unit trusts and oeics authorised by the Financial Services Authority (FSA).
• Investment trusts.
• UCITS and non-UCITS funds authorised by the FSA (this more or less means European unit trust type funds).
• Shares transferred from a HMRC approved employee share scheme.
• Life insurance policies.

Cash may be held in a shares ISA provided you intend to invest it (within a few months is probably reasonable), but it's taxed at 20%.

Note that shares listed on the Alternative Investment Market (AiM) do not qualify.

If the interest rate on your cash ISA looks uncompetitive then don't worry, it's very easy to transfer to a better rate with another bank or building society. You simply need to complete an ISA transfer form with the provider you wish to move to. They'll contact your current ISA provider and arrange for the monies to be transferred, which should be complete within 30 days. Don't withdraw the money yourself, else you'll lose the tax benefits!

You also have the option to transfer your cash ISA into a stocks & shares ISA using a similar process to above. However, be warned, this is a one-way process. You're not allowed to move the stocks & shares ISA back into a cash ISA at a later date.

If you hold unit trusts within your ISA you can easily switch to different funds with the same ISA provider. There's usually a small administration charge of around 0.25% but you shouldn't face any fund initial charges. The switch should be complete within a couple of days.

If your ISA provider is the unit trust manager you'll likely be restricted to their range of funds. However, if your ISA provider is a fund supermarket then you should be able to switch into almost any unit trust on the market, regardless of unit trust manager - a far preferable option.

If you own shares in a self-select ISA you can easily switch to different shares, subject to the stockbroker's dealing fee.

If you want to switch from one ISA provider to another, you'll need to transfer your ISA rather than simply switch funds. This means completing an ISA transfer form with the new provider and they'll organise the rest. Your existing units will be sold and the monies sent to the new provider who'll then purchase your new funds, the whole process typically takes several weeks.

Beware you'll face initial charges on the funds you're transferring to, although using a discount broker can reduce (or even remove) these.

Buying your ISA directly from a unit trust manager is normally the worst of all routes. Although the ISA wrapper will probably be free, you'll pay the full fund initial and annual charges and get no advice or guidance.

There's no benefit in taking this route, so avoid.

Fund supermarkets (or 'wraps') are a great idea, you can combine funds from different managers (and often shares too) within your ISA. This provides much greater flexibility than a fund manager ISA, cuts down on paperwork and means you can view your stocks & shares ISA investments in one place, making it easy to keep track of your portfolio. They usually have a range of useful online investment tools and switching funds is quick, easy and cheap. Most fund supermarkets provide ISA wrappers free of charge.

While you can use fund supermarkets via financial advisers and discount brokers, some also allow you to buy directly. Buying direct from a supermarket is usually cheaper than doing so from a fund manager, but not as cheap as using a discount broker, nor will you receive advice.

Buying unit trusts within an ISA through a financial adviser usually means paying the full initial and annual charges (some advisers negotiate a small initial charge discount), but you should receive advice in return as the adviser is paid a sales commission from the fund manager. If the adviser works on a fee basis then they should refund or waive all commissions, effectively reducing your initial and annual charges (by around 3% and 0.5% respectively).

Bear in mind that a fair proportion of financial advisers are not investment experts, so they may recommend inappropriate funds or push funds of funds (which are expensive but make their life easier). There are good ones out there, don't be afraid to shop around until you find one you can trust - and make sure they're independent.

If you're fairly comfortable deciding yourself what unit trusts to buy within your ISA, then this is by far the cheapest route. Discount brokers don't give advice, but will share with you the commission they receive from fund managers. Most will provide a fair amount of fund and investment information, ranging from thinly disguised sales material to genuinely useful comment and research.

As a minimum you should expect any initial commission to be waived, which should reduce your initial charge to 0.5% or less.

Some discount brokers also rebate a share of the annual (or 'trail') commission, usually up to half. This is worth seeking out as it could save you a fortune over time.

There are a handful of discount brokers who'll rebate all commission, both initial and annual, and instead charge a flat annual fee of around £10-20. Service and assistance will be 'bare-bones', but this can be great value if you're a competant investor.

If you wish to hold shares, gilts or corporate bonds within your ISA then you'll need to use a self-select ISA, as offered by many stockbrokers (although some 'wraps' may also allow this). These allow you hold pretty much any allowable investment within your stocks & shares ISA. However, as well as dealing fees on the underlying investments, expect to pay upwards of £20 a year for the ISA wrapper itself.

Beware, some stockbrokers charge sky high fees for their self-select ISAs, to the point they could offset any tax savings in the short term.