How to choose an ISA

Confused manIf you have some money to put into savings or investments, then an ISA is your best friend. You can currently put up to £10,200 a year into an ISA - or £5,100 if you want to keep your savings in cash - and any returns are paid tax-free.

You can even split your money between the two, sheltering £5,100 from tax in a cash ISA and a further £5,100 in a stocks and shares ISA. But how do you decide which ISA to go for?

Cash ISAs
As explained above, the maximum you can put in a cash ISA is £5,100, whereas all £10,200 of your 2010/2011 ISA allowance can go into a stocks and shares Isa. In the 2011/2012 tax year, this amount will increase to £10,680, or £5,340 for cash ISAs.

These accounts, offered by most banks and building societies, are ideal for anyone saving for a rainy day, or a short-term goal. Like ordinary savings accounts, they are basically risk free. But the interest rates on offer vary hugely.

Some accounts, for example, offer as little as 0.1%, while the current instant-access market leader - Barclays Golden ISA Issue 3 - pays a headline rate of 3.25%, including a 12-month bonus of 1%.

This particular deal does not accept transfer from existing ISA accounts. However, it can be opened with as little as £1 and is a great option for new ISA savers.

If you want an account offering a better rate for savings built up over the last few years, the best account with a variable rate that does accept transfers from other accounts is from Nationwide Building Society.

Its e-ISA pays 3.10%, including a bonus of 1.35% that lasts until July 31, 2012. You will have to open a Nationwide card account to qualify, though.

Stocks and shares ISAs

ISAs that invest in shares and funds are a bit more complicated than cash ISAs.

They allow you to put money into a range of investments, including unit trusts, open-ended investment companies and investment trusts, as well as government and corporate bonds.

Generally speaking, the aim is to pick funds that deliver high returns for the lowest risk - but that also carry low charges.

Independent financial advisers can help you to pick one that suits your needs, but you will pay the full charges on funds in return for this advice - whereas these fees are discounted if you use a fund supermarket.

Some experts argue that novice investors should begin with index trackers, low-cost funds that mirror stock market performance, or global investment trusts. However, if you are more experienced you can also choose a self-select account that allows you to buy individual shares and put them into an ISA.

To give you an idea of what the experts are recommending for this year, Darius McDermott, managing director of Chelsea Financial Services recommends Artemis Strategic Assets, which invests in UK and overseas equities, fixed interest, currencies, commodities and cash.

If you would like to be more adventurous, his favourites for investors with a higher risk profile are the Schroder US Mid Cap and Neptune European Opportunities funds.

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