ISA savings: The savviest option?

ISAs have now been with us for over a decade and it's now pretty apparent they have proven themselves to be a popular mainstream product. ISAs are enjoyed by all kinds of people looking to make tax-free savings and have even gone through some changes this year that make them even more attractive.

Originally brought in by the government as a replacement for personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs), there are now well over 19 million ISA accounts in place across Britain. However, there are a number of ISA types available, so you would be forgiven for being a little confused about which one is right for you.

The first thing you might want to consider is whether a fixed rate ISA is best for you or if you would prefer something with a variable rate. The fixed option will allow you to accurately project what kind of return you can expect on your savings, while a variable rate might be better if you want to track the national rate of interest. But once you've decided which of these is best, you may still need to address a number of common misconceptions that exist about ISAs. One of these is that they are only suitable for long-term investment. Of course, it is true that your ISA could perform better if it is left to mature for a greater period, but if it is a short-term savings facility you want, you may find they are also well suited to your needs.

When looking for the best ISA rate, you'll also notice differences between them that relate to how they generate a potential return on your money. A cash ISA effectively operates as a high interest savings account that provides interest that is tax-free. A stocks and shares ISA, on the other hand, will use investments, properties or bonds that can be selected by you or your provider to make your money work harder.

But no matter which of these you go for, you will be subject to a limitation on how much can be put in over the course of a tax year. However, this allowance was revised by the government, which means there is now even more opportunity to save tax-free. From April 6th 2010, all eligible savers can put up to £5,100 into a cash ISA. Alternatively, you can now put anything up to £10,200 into a stocks and shares ISA - less anything you have already put into a cash option.