Cash ISAs (and TESSA-Only ISAs)

A cash ISA operates in exactly the same way as if you were putting money into a building society savings account that pays interest (only this time, you don't pay tax on the interest). The limit for contributions to a mini cash ISA or to the cash component of a maxi ISA are £3,000 per tax year.

Finding The 'Best' Cash ISA

Obviously what you are looking for is the best interest rate possible at the time of opening the ISA, as well as an interest rate that remains competitive in the future. The first is relatively simple but the second is trickier because you don't know what your chosen provider will do with its rates in future.

If there is a guaranteed or bonus rate make sure you check how long that rate will continue for -- sometimes it may only be for a few months. Banks also have a habit of attracting us with high rates when they launch a new account and then quietly cutting their rates at a later date by sending a boring letter that you throw in the bin because you think it's a circular.

To help you find the highest payers "Best Buy" tables are published regularly in the weekend money sections of many major newspapers and many financial websites will have similar information.

Keep Tabs On Your ISA

Should the interest rate fall, or fail to rise in line with others on the market, you can switch your cash ISA to another bank or building society that offers a better rate. All you do is tell the new bank that you want to switch your ISA to them and they will help you to arrange the transfer of your savings for you.

On no account should you close your current cash ISA, withdraw the money and try and put it into a new ISA. This would count as a new subscription and waste some or all of your ISA allowance for the current year. You want your money to remain safely inside your ISA while it's switched to a different location. Note that some ISAs make a charge if you decide to move your funds. You may have to check the small print to find this. It's advisable to avoid these accounts in the first place if possible.

One extra point about cash ISAs is that, ordinarily, you have to be 18 to open any kind of ISA. However, anyone aged 16 or over can open a Cash ISA. Although few people aged 16 or 17 pay tax, if you intend to keep your money within your ISA for several years you may save tax on the interest you earn in subsequent years.

TESSA-Only ISAs

Tax Exempt Special Savings Accounts (TESSAs) were a form of tax-free savings account that existed before ISAs. They lasted for five years and you were allowed to invest up £9,000 over the life of each account. You got all your interest tax-free and once your five years were up you could either take your money or put your money into a new TESSA account, and continue to receive tax-free interest.

The last day you could open one was 5 April 1999, so there aren't any TESSAs in existence any more. But you were allowed to roll a TESSA that matured between 6 April 1999 and 5 April 2004 into what is known as a TESSA-Only ISA (or TOISA for short) so that you could continue to receive tax-free interest.

The rates for these TESSA-Only ISAs are broadly similar to cash ISAs and the principles for choosing one are very similar -- go for a high rate, keep one eye on it and be prepared to move your cash should the rate you're being offered become less attractive.

In theory you are entitled to reinvest the capital element of your TESSA-Only ISA into a cash mini ISA or the cash component of your maxi ISA. However, in practice many companies don't let you do this -- they are not obliged to -- and will insist you open up a TESSA-Only ISA so that they have more flexibility with the interest rates they can pay.

Be aware that there are some curious variants of the TESSA-Only ISA that might catch your eye. These are not savings accounts but are linked to the stock market.

In these instances, your returns will be linked to the performance of one or more major stock markets and you'll be promised, say, 100% of the growth over a five-year period with no risk to your capital, as long as you agree to lock your money in for that period. The provider gets to keep the dividends however, which could amount to 15% to 20% over the course of five years. So, while the capital guarantee has its attractions, handing over up to 20% of your potential gains is a hefty price to pay for the privilege.