If you want to start building up your savings, then your first step should be to open an ISA. The great advantage that ISAs hold over standard savings accounts is that they permit you to earn interest tax free ? great for higher rate tax payers, in particular.

Unfortunately, individual savers are only permitted to deposit ?7,200 in an ISA each tax year; and of that, only ?3,600 can be put in cash. This will rise to a total of ?10,200 in April 2010.

If you”re looking for a safe and uncomplicated way of maximising the interest on your savings, then you should be looking at cash ISAs. Like regular savings accounts, these allow you to securely invest your capital with a fixed rate of interest - the only difference is that the interest isn”t subject to taxation. Interest rates attached to cash ISAs do tend to be lower than other savings plans; but when you bear in mind that basic rate taxpayers could earn a quarter more interest at the same rate and higher-rate tax payers two-thirds more, they are generally a more profitable option.

While a cash ISA will allow you to accrue tax-free interest with minimal risk and easy transfers, those ready to risk their capital may do better with a stocks and shares ISA. You”ll need to be prepared to lock your money away for longer ? but you may be rewarded with high returns.

Put simply, a stocks and shares ISA allows investors to accrue tax free savings through speculating on investment funds or individual stocks and shares. Your capital won”t necessarily be protected as it would in a cash ISA, but for many the risk is balanced by the potential rewards.

Unless you”re familiar with the financial world then your best bet is to go for a capital-protected ISA as opposed to an emergency markets fund. With lower charges and less risk of losing your savings, this is a good option for those just starting out.

If you want instant access to your cash and are looking for a short term investment then a stocks and shares ISA isn”t for you. You”ll need to invest for a minimum of three to five years to have a chance of good returns. Other disadvantages include the management charges, which can potentially be high, and the danger of selecting a poorly performing fund.

Investing in a stocks and shares ISA is a great way to benefit from maximised tax free savings. Risking your capital can really pay off ? but unless you”re an experienced financial dabbler it’’s a good idea to consult a good financial advisor before making an investment.

    Posted in Investing from Investor on 2. Feb. 2010