During periods of economic downturn, finding a secure investment can prove very helpful because of the instability of the economic climate. The current economic situation is highlighted by the UK’s GDP decreasing by 0.4% and its inflation rate dropping by 1.4% in 2009. The uncertainty of the economic climate also means people are investing less because they fear the placement may be insecure. However, some financial products such as Cash ISAs provide the customer with a stable investment.

The British Government introduced cash ISAs in 1999. They were brought in to replace the old Personal Equity Plans (PEPs) and the Tax Exempt Special Savings Accounts (FESSAs). Unlike PEPs and FESSAs which predominantly used by the middle classes, cash ISA accounts were introduced in order to offer a broader range of the population the possibility of opening a saving’s account without having to pay tax on the interest the account generates.

Cash ISAs solely relly on the money the customer chooses to invest into the account. The minimum amount that the customer can invest being £1.00 and the maximum being £3,600.

Furthermore, it is also possible for one customer to have several of these saving accounts and to transfer revenue between these accounts. However, customers are only aloud to open one cash ISA account during the fiscal year (from April to April).

Cash ISA accounts are also very flexible in that the customer can transfer up 25% of the money that was initially invested into the account without notice or loss of interest before the account reaches maturity. If however the 25% limit on transfers out of the account is exceeded, the saver will be subject to a 90-day loss of interest. However, as it is the case with any other saving account, the money invested in an ISA account can also be withdrawn when the account reaches maturity.

The interest rates on these types of saving accounts are fixed which means the revenue they generate is stable and tax free as the type of account cash ISAs replace were also tax exempt. However, it is rumoured that after 5 April 2010 the interest generated by this type of savings may no longer be tax-free.

Cash ISA savings accounts can prove to be interesting investments, particularly in times of economic downturn, because they are tax-free and the interest rate remains stable until the account reaches maturity. What’s more, that type of savings account is very flexible as the saver is able to transfer money out of the account at any time. This means the funds that are on the account are always available to the saver who also has the possibility to transfer the revenue generated by one ISA account to another.

Most financial advisors encourage their clients to have at least one ISA acting as a tax shelter for savings income or investments. These accounts offer the ability to deposit money every year, up to a maximum amount set by the FSA.  As you earn interest or dividends on your ISA, you do not have to report your earnings to the taxman. You also enjoy full use of your money at any time, since these accounts do not typically include restrictions for withdrawals.

To ensure you are getting the most out of your ISA, take a peek at these four easy tips.

Maximize Your Contributions

The more you put into an ISA, the more you earn; and the more you earn, the more taxes you can save. Currently, the maximum deposit allowed for an ISA each year is £7,200 for people under 50 and £10,200 for people over 50.  During the next tax year, the maximum contribution amount will be £10,200 for everyone. Of this amount, half can go into a cash ISA.

Shares ISAs can receive the full amount each year, or £7,200 for those under 50 and £10,200 for those over 50. If you open a cash ISA and a shares ISA, the total amount contributed to both cannot exceed the contribution limits listed above.

Don’t Withdraw Money

Although you can withdraw funds from your ISA, you cannot replace those funds during the same tax year if you exceed the maximum allowed contribution.

For example, someone who deposits £10,200 and then withdraws £2,000 may not replace the £2,000 during the same calendar year. However, someone who deposits £5,000 into an ISA and then withdraws £2,000 may put the money back, since the total deposits for the year is still less than the £10,200 maximum. To ensure you keep your full tax benefits, avoid withdrawing from your ISA whenever possible.

Choose the Best Account for Your Needs

For those wanting to invest over the long term, a shares ISA may offer the best return on the initial investment. However, those who need their money readily available may find a cash ISA suits their situation best. When you choose the best ISA for your needs, you ensure you don’t have to pay any unnecessary fees or penalties on your account, leaving more money to earn a return for you.

Always Shop for the Best Rate

It stands to reason that you would initially shop around for the best rate when you open your ISA. However, since ISA money can be transferred to a different ISA any time, it pays to keep your eye on the current rates and move your account as you see fit. This is particularly true if you take advantage of a bonus rate that is only good for a period of time. When that rate expires, it may be time to move your money to a different manager to continue to earn a good return on your investment.

Opening your ISA is just the beginning. The next step is to manage your account wisely so you get the biggest bang for your tax-free savings buck.

More Best Isas Articles

A watchdog has requested an Office of Fair Trading investigation into savings account providers offering temporarily high headline interest rates as a method of attracting savers to cash Isas.

The best Isa rates are traditionally offered close to the so-called ‘Isa season’ which falls around the end of the current tax year and the beginning of the new (5 – 6 April).

Individual Savings Accounts (Isas) were introduced in the UK 11 years ago, offering people a tax-free incentive to encourage them to save.

The average interest rate on a cash Isa stands at just 0.41%, according to Consumer Focus, with several banks and building societies “baiting” new customers through short-term higher rates.

The watchdog’s approach was criticised by the British Bankers’ Association (BBA)

Consumer Focus made a super-complaint to the trading regulator regarding the £158bn cash Isa market.

The statutory consumer organisation believes that people are missing out on interest returns of up to £3bn every year, partly due to the difficulty of switching Isa providers.

The Office of Fair Trading (OFT) is now required to consider the complaint then provide a response within 90 days.

A BBA spokesman said Consumer Focus chose to launch its complaint “without any discussions with the banking sector”.

“If we had been given the chance, we could have explained the work we are already doing with the regulator to help Isa customers,” he added.

Around 37% of households in the UK currently have money deposited in a cash Isa. A significant proportion of those use up their full annual Isa allowance.

In the new tax year beginning 6 April, the limit people can save in Isas each year will increase from £7,200 to £10,200, half of which can be put into a cash Isa,. plus half, or the full allowance, into stocks and shares Isas.

As one might expect at this time of year, there are several high paying cash Isas, with even more attractive returns for those that are willing to lock their cash away into a fixed rate Isa. For example, the RBS Isa pays 4% on its 3-year plan, with the option to transfer cash from previous years’ Isas.

If you would prefer to earn tax-free interest on an instant access Isa, consider either the Alliance & Leicester Isa or Santander Isa both offering 2% on balances of £1-£9K and 2.75% on anything above. Alternatively the Lloyds Isa pays 2.50% with instant access.