Choose the ISA road for a trusty savings vehicle

The ISA route is clearly popular with accounts rising 53 per cent since 1999/2000 and with over a third – actually 37 per cent – of households saving through an ISA. Halifax say ISA growth is fastest among under 25s and female investors.

Up to 10,200 can be saved in an ISA this tax year for those aged 50 and older and 7,200 for younger investors. Next year all adults enjoy the higher rate.

An ISA is an investment wrapper and money can be saved in three ways:

n stock market, which might be a fund (like a unit trust) or a single company; cash; a combination of both the above.

The whole amount can be invested in an equity or stock market account but a maximum 5,100 (3,600 for those under 50 years) in an interest-bearing cash account. Money is currently split 58 per cent cash ISAs and 42 per cent equity.

Children are ineligible with 18 years the minimum age for a stock market ISA and 16 years for a cash one.

If a PEP (Personal Equity Plan) was held, it automatically became a stock market ISA from April 2008.

An ISA should be flexible and portable. The Treasury rules state there is no minimum holding period or required sum to be eligible although some providers set such requirements.

If unsure where to invest ISA money, do not miss the tax year deadline. Park it temporarily either within an instant access cash ISA or, if that limit has been reached, in the deposit account of a stock market ISA.

However, to discourage too much going into the latter, the Inland Revenue impose a 20 per cent tax and you must intend to invest it later in the stock market. The rate may not be high. Typically Fidelity pays 0.2 per cent below Bank rate which is 0.5 per cent.

Three common myths prevail about ISAs:

n only one stock market choice can be made each year;

n in view of their tax-efficient status, ISAs are not liable to inheritance tax;

n sums invested can be switched back and forth between cash and stock market investments.

To overcome the potentially limited choice of only one equity, place the money via a broker onto a financial 'platform'. This should give access to over 1,000 funds. Any contribution can then be split between different funds – whether paying by lump sum or monthly – with switches made for little or no charge.

Upon death, the current value of all ISAs held forms part of one's estate. Money held within an ISA is exempt from both income tax and capital gains tax. They are not tax-free as the 10 per cent tax credit on dividends cannot be reclaimed. ISAs are of course individual and cannot be held in joint names.

Whilst money invested in a cash ISA can be moved into a stock market part, the switch is not currently allowed in reverse.

Far too few regularly check on the performance of their ISAs. This explains why money languishes at just 0.01 per cent at Newcastle, 0.05 per cent at C&G and at only 0.10 per cent with Alliance & Leicester, Barclays, Dunfermline, Halifax, Saffron Building Society, Virgin, Wesleyan and West Bromwich, according to research by Moneyfacts.

Often better interest from the same provider is only available for new business. In this situation, transfer out to another provider and if their rate is not competitive, back to the original one at a far higher interest rate. If transferring from previous ISA years, there is no obligation to use the same provider as for this current year.

Take care with those offering bonus rates. Manchester offered 3.01 per cent which included 0.70 per cent bonus for 12 months, and required 35 days' notice or a penalty. After taking in substantial sums, it dropped the rate but gave savers less notice to transfer or close.

To gain stock market exposure, funds have the benefit of sharing a wide range of shares, which reduces volatility. Only the very wealthy could hope to gain such a portfolio from individual share ownership.

For a low cost approach, try Legal & General. Their index collectives aim to replicate a specific range of investments, like the FTSE100. To benefit from advanced emerging markets – such as Brazil, Hungary, Mexico and South Africa – look at their International Index, which is little publicised.

For global and trading balance, more savings ought to be made in Australasia. Legal & General offers 41 per cent in Australia and two per cent in New Zealand through their Asian Income Trust. In the current low interest environment with inflation rising again and with the prospect of a better return than a cash ISA, look at an equity income ISA. Newton, part of The Bank of New York, is a specialist in this sector, delivering consistent performance.

In 2009, its Higher Income Fund achieved 6.9 per cent, Global Higher Income 4.8 per cent, Asian Income 4.7 per cent and European Higher Income 4.6 per cent. These rates are net of tax and annual fee but exclude any initial charge.

Others prefer a with-profits fund which aims to smooth out the ups and down of the stock market. NFU's Mutual Shrewd Savings Plan is just such a vehicle, whose investments include fixed interest stocks, property and shares. Savings can be from 25 monthly or in lump sums from 1,000. There is a three per cent initial fee and 1.25 per cent annual charge.

Investment trusts form one of the best ways to save in the stock market. Each is a quoted company in its own right and therefore can be bought through a stockbroker (like Brewin Dolphin, Charles Stanley or Redmayne Bentley, all in Leeds) but many offer their own savings plans.

Few will currently opt for the US with an annual deficit around $1.3 trillion, the indebted UK with virtually no growth or Eurozone with its troubled Greek and Spanish members. Instead emerging markets – notably China and India – have the confidence and buoyant home economies.

If you have sufficient confidence and knowledge, use a self-select ISA through a plan manager, such as broker TD Waterhouse which has no administration fee if the value is 3,600 or above and deals online cost only 9.95.