ISAs & Unit Trusts

How does it work

What is an ISA?

ISA stands for 'Individual Savings Account'. It's a kind of account that allows you to save money without having to pay any further tax on your returns.

Stocks & Shares ISAs invest in unit trust funds across a range of 'assets' such as shares, bonds and property. Where as Cash ISAs are cash deposit savings offering variable or fixed rates of interest.

What is a Unit Trust?

A unit trust is a collective investment where a large number of investors pool their money together. These funds are then used to invest in assets such as property, bonds and shares with the aim of making investment profits from capital growth, interest and dividend income. Each unit trust is divided into a number of equal-sized units, which can be purchased by investors at the buying price and sold back to the fund at the selling price. Unit trusts can be held within a stocks and shares ISA or on their own.

The key points

• ISAs allow you to get the income and returns from you savings and investments without having to pay any further income or capital gains taxes.
• A unit trust is a different kind of investment to a bank or building society account, where the capital invested is secure. The value of unit trusts can go down as well as up depending on the value of the trust's underlying investments. Neither the capital invested nor the level of any income is guaranteed and you may get back less than you invest.
• You can either invest a lump sum or save regularly each month. The Unit Trust is valued every day; this means that on any given day you can find out exactly how your investment is worth and how much it's performing. There is no fixed term of investment but unit trusts should be held for the medium to long term, at least 5 years.
• Cash ISAs are available to all UK residents aged 16 or over. Stocks and shares ISA s are available to all UK residents aged 18 or over.
• The maximum cash ISA investment allowance is £5,340. but you can invest in a stocks & shares is £10,680 per tax year (less any amount you save in a cash ISA).
• There is no maximum to how much can be invested. The price of the units depends on how the underlying investments perform. The number of units allocated to each investor depends on the amount invested.

Glossary

Investing your money may involve some unfamiliar words and phrases. Here's a quick guide to some of the most common ones.

Annual Equivalent Rate (AER)

This is the rate that is generally quoted as interest paid on savings and investments so that you can compare accounts. It is used to demonstrate what your interest return would be if the interest was compounded (adding interest on to the balance then paying interest on the new higher balance) and paid annually instead of monthly (or any other period).

Assets

Things that have earning power or some other value to their owner.

Base Rate

The interest rate set by the Bank of England from which all other interest rates are calculated.

Capital

The amount of money you borrow.

Correction

A short-term drop in stock market prices. The term comes from the notion that, when this happens, overpriced stocks are returning back to their "correct" values.

Credit Crunch

The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had. This in turn resulted in more expensive loans and mortgages for ordinary people.

Current Assets

These are the things that can easily be turned into cash and are expected to be sold or used up in the near future.

Direct Debit

This is an instruction from you to your bank or building society allowing someone to take money from your account. The amount of money taken can vary, but you must be told the amounts and dates beforehand. You can utilise direct debits to pay bills automatically from your account on a regular basis.

Equity

In a business, equity is how much all of the shares put together are worth.  Shares are often referred to as equity.

Fixed Rate

A rate of interest guaranteed not to change over a fixed period of time.

Gross

The way interest is paid before any deductions e.g. tax/fees.

Inflation

The upward price movement of goods and services.

Interest Rate

The percentage rate that is paid on every £1 saved or borrowed with the bank.

Net

The amount of interest paid after deduction of income tax (or other fees).

Recession

A period of negative economic growth.  In most parts of the world a recession is technically defined as two consecutive quarters of negative economic growth - when real output falls. In the United States, a larger number of factors are taken into account, like job creation and manufacturing activity. However, this means that a US recession can usually only be defined when it is already over.

Standing Order

A standing order can be set up if you want to transfer a specific sum on a regular basis to another account. This can be used to make regular savings from a current account to a savings account.

Useful Links

Here are some useful links we find helpful and thought you might feel the same.

• www.moneymadeclear.fsa.gov.uk - The Investment section of Money Made Clear. No selling. No Jargon. Just the facts.
• www.uar.co.uk - The Unclaimed Assets Register (UAR) can trace forgotten investments 
• www.eiris.org - Ethical Investment Research Service (EIRIS). Information about product providers and other sources who provide ethical investments.

Tools

Use our budget calculator