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The ISA is a powerful tool that everyday citizens can use to grow their wealth to its full potential. However, there are several factors that you should be aware of in order to get the most out of this instrument. With savings accounts paying less in interest in 2013, it can be tempting to pull cash out of your ISA, but by doing so, you could end up paying more in taxes.

The ISA

An individual savings account is a powerful alternative to standard savings accounts because of one key difference between them: The ISA is–up to a point–a viable tax shelter. When you withdraw money from any standard savings account, you will find yourself immediately hit with at least a 20 percent tax on any interest you earned. With an ISA, on the other hand, your cash, dividends and capital gains are all exempt.

The ISA was developed in 1999 as a replacement for personal equity plans, which, while popular with the middle class, were not embraced by other economic classes. The ISA addresses this issue by making it possible to earn tax-free capital gains beyond £10,000 per year.

There are two types of ISA: the standard cash ISA and the stocks and shares ISA. The cash version is simply a tax-free savings account, and it offers either fixed AER or variable, with the variable option being the most common. Many ISAs also come with a guaranteed base rate, meaning that you will always earn some interest on your money, regardless of the state of the economy.

The stocks and shares ISA offers much more flexibility in that you can invest in bonds, public stocks, trusts and open-ended investment companies. While this can give your money much more room to grow, it’s important to keep in mind that these securities can lose value as well.

The savings power of an ISA is not limitless. In fact, there is a hard limit baked right in known as the “ISA allowance.” This allowance represents the total amount of tax-free money that you can deposit each year. The allowance varies year to year, and the total for 2013 is £11,520. Put another way, you can earn tax-free interest on up to this amount each year, but deposits beyond that will be taxed at the normal rate. Additionally, only £5,760 of this amount can come from cash deposits.

Investing and Interest

ISAs typically offer interest rates on par with other savings accounts, and this is primarily determined by the base rate set by the Bank of England, as well as the overall state of the economy. 2013 has seen a general downturn in interest rates primarily due to the funding for lending scheme. This scheme–initiated by the Bank of England–seeks to provide banks with extra funds so that they can offer consumers attractive interest rates on secured loans. The immediate result is that banks are focusing more on attracting loan consumers and less on attracting savers. Less competition among banks results in lower ISA interest rates. In fact, The average ISA rate in 2013 was 1.74 percent, down from 2.55 percent in 2012.

Sylvia Waycot of the financial information company Moneyfacts has said that most new ISAs are opened in January and February of each year, but that there was a significant decline in the number of new ISAs opened in 2013. If you are opting to spend your cash instead of saving it due to lower interest rates, keep in mind that you can convert your cash into stocks or bonds with a stocks and shares ISA. While the interest rate on the ISA itself may not be high, you can still experience high gains over time with a diverse portfolio. Additionally, if you earn more than than £10,600 in capital gains outside of the shelter of an ISA, you will pay a good portion of that to the government in taxes. Likewise, if you earn dividends on your shares, you will be taxed at your tax rate outside of an ISA–which can soar as high as 37.5 percent–whereas dividends are always taxed at 10 percent from within an ISA regardless of your income.

Limitations

There are several limitations that you should be aware of before investing in an ISA. Most significantly, your ISA allowance is a finite resource. For instance, if you invest £1,000 in cash at the beginning of the year and then withdraw it, you can then only invest an additional £4,760 in cash for that fiscal year. The same goes with stocks, so you will have to carefully weigh the benefits and risks of withdrawing your funds once deposited. However, if you do withdraw your funds early, you will receive all of the interest that you have accrued up to that date.

You can, at any time, switch ISA providers. However, you must first file a transfer form to do so. If you withdraw the funds without filing this form first, you will have to pay taxes on all of the interest the account has earned. You can procure the appropriate form from your current ISA provider. One final limitation to be aware of: you cannot use money in an ISA as collateral for a secured loan. This is primarily because you can withdraw money from an ISA at any time. You can, however, often use a certificate of deposit as collateral.

While many developed nations are finally showing signs of recovery after the 2008 crisis, many developing countries have rebounded at an astonishingly faster rate. In fact, in many emerging markets the financial crisis was barely even noticed. Thus, many UK investors are looking at these developing countries as a way to get better returns on their investment ISAs. Emerging economies always come with an element of risk, but consumers looking for long-term gains will find that the best ISAs perform well when focused on a number of emerging markets. This article will look at what emerging markets are currently attracting the most attention.

What are the emerging markets?

An emerging market is a loose term that can be applied to hundreds of countries, from powerhouses like China and Russia to the smaller economies of Africa and Central America. The four biggest emerging markets, Brazil, Russia, India, and China, are often referred to as the BRIC nations and these countries often attract the greatest attention by investors. Other players, however, such as Indonesia or Turkey, should not be overlooked given their impressive economic growth in the past few years.

BRIC

While the four BRIC countries dominate discussion of emerging markets, it is important to keep in mind that each BRIC country comes with its own unique set of circumstances. Brazil, for example, has greatly benefited from rising commodity prices, but it is still struggling to address income inequality concerns. Russia, meanwhile, is largely driven by the oil sector and investors in this country would essentially be banking on the price of oil rising over the long term. India, meanwhile, has proven to be particularly volatile, but it also holds a great deal of potential. The Indian middle class is one of the largest on the planet and is well-educated. The Indian economy is also more diversified than many other emerging markets, although the political situation is notoriously fluid and could always cause unforeseen blips in the market. Finally, China, the world’s most populous nation, has risen dramatically over the past decades to become one of the largest economies on Earth. China’s success has largely been due to exports and infrastructure, meaning that many investors are cautious about banking too heavily on the Chinese economy continuing with its stratospheric rise in the future. However, the Chinese government is now focusing on domestic consumption and helping develop the more impoverished western regions, meaning there is still plenty of room for growth in the long term.

Elsewhere

Many regions outside of the BRIC countries are also enticing investment opportunities for those with the best ISA funds. South-east Asia continues to grow, with countries like Vietnam, Singapore, Malaysia, and Indonesia proving good investments. The less developed countries of Central and South America are also showing great progress and have plenty of room to grow. Africa, which has long been overlooked by the financial world, is now coming on strong with one of the fastest growing regional economies in the world. Of course, while Africa has great potential, especially in terms of infrastructure investment and commodities, it is still a bit of a Wild West in economic terms and is really only for those who are willing to bet on long-term gains rather than short-term results. Finally, the Middle East is another volatile region, but one that is highly dependent on one industry: oil. Nevertheless, as the economies of the UAE, Saudi Arabia, and Qatar have shown, that focus can result in huge returns for investors over time.

Investing money in the best ISA funds that focus on emerging markets will mean balancing the money a customer expects to make back on his funds with the potential risk involved with any emerging market. While some consumers may be tempted to put all of their money into one promising market, the best approach is to spread that investment over a larger region or even over the entire globe. By spreading money this way, investors are more likely to see their money grow substantially over the long term while still protecting themselves from any risks that may come up in the immediate future.