An ISA is a tax free savings account with an annual contribution limit currently at £15,240 per person during each tax year. Broadly speaking ISAs are divided into two camps, cash ISAs and stocks and shares ISAs and you are not restricted other than the annual allowance and how you apportion the money.
For example, you can choose one provider for a cash ISA payment of £10,240 with the remaining £5,000 going to a different company which provides advice on stocks and shares ISAs.
Cash ISAs are similar to savings accounts but the interest you earn is tax free and, like savings accounts, they come in many shapes and forms, from tying your money up on a fixed rate for five years to having instant access to it.
A stocks and shares ISA differs from the cash ISA in that it has risk attached to it as the value of the investment can decline. However, there are many different types of these ISAs with different risk profiles attached to them. For example, government and corporate bonds are IOUs issued by governments and companies which typically pay a fixed rate of interest over an agreed term, you then receive the sum back that you originally invested. The other areas you can invest into with an ISA are property, including residential and commercial, with the main body of stocks and shares ISAs being invested into shares.
Again there is a whole range of risk you can buy into from investing into large companies which typically occupy the FTSE 100, such as BT to micro sized companies that occupy the AIM market such as ASOS.
Also you can invest into overseas shares to add further diversification to a portfolio. To minimise risk you normally buy into a basket of investments and can choose the type of risk you are comfortable with in this area. Improvements to ISAs have included an improved allowance and the ability of married couples to pass ISA portfolios to each other on death, and cash ISAs have been granted the flexibility to withdraw and replace ISA funds within the same tax year.
Recent developments in the ISA market have involved peer-to-peer lending being approved as ISAs, with savers being matched up with people or businesses whch want to borrow money. This will hopefully allow investors to get a better return then cash based accounts.