Investment ISAs offer a tax free home for your savings and the chance of more impressive returns than your average cash account. But with swathes of investment jargon and potential risk to your capital, many people are unnecessarily put off.

Here's a beginners guide to Investment ISAs that'll help you decide if you should take the plunge.

What exactly is an Investment ISA?

The big benefit of any ISA is that it protects your money from the tax man.

In any standard savings or investment account, you will have to pay tax on any interest you earn or profit you make. This is usually deducted automatically before you receive your gains.

An Investment ISA is essentially a tax free wrapper which can be placed around a variety of different investments to prevent you from having to pay tax.

Essentially money you invest is used, either directly or indirectly, to buy shares in the stock market. The performance of these shares will then determine if you make a profit and if so how much.

Ordinarily you would have to pay income tax on the income you earn from your investments and Capital Gains Tax on the profit you make from selling shares. However, invest through an Investment ISA and you'll receive any profit untaxed.

Does your age matter when investing in an ISA?

You must be at least 18 years of age to open ISA investments; however, the age threshold for most Cash ISAs is 16.

As long as you're at least 18 years old you are free to invest your money as you see fit, although your age may play a part in the reasons behind why you're investing.

If you're looking at investment isas for over 50s or for the best investment isas for over 60s for example, you'll need to think carefully about how long you plan to invest for and how much risk you're willing to take, especially if you're investing your hard earned savings.

If you've just turned 18 you might be more willing to consider riskier investments that offer higher returns, especially if you're planning to stay invested for the long term.

ISA Investment Limits

There is a limit to the amount you can save through an ISA each year, the figures below are for this tax year:

  • You can save or invest a total of 15,240 in ISAs this tax year

  • Up to the full 15,000 of this can be saved in a Cash ISA

  • Whatever is left of your allowance can be put into an Investment ISA

So if you have put 3,000 into a Cash ISA, you can only invest up to 12,240 in an Investment ISA during the 2016/17 financial year.

What will you have to pay?

Investing in an Investment ISA does come at a price.

Unlike saving into a Cash ISA, if you opt to invest your savings into an Investment ISA you will have to sacrifice some of your capital in fees.

The reason for this is that the administration of Investment ISAs costs more to the providers than a relatively simple Cash ISA.

In most cases you will have to pay an initial deposit fee to cover the cost of buying the shares. This can vary significantly depending on the type of Investment ISA you choose but is usually around 2-5%.

After the deposit fee, you will also have to pay an annual maintenance fee; this is usually around 1-2% and is taken before your profits are paid.

As they can vary from account to account, remember to consider all the fees that you'll have to pay when you compare Investment ISAs so that you're able to choose the best one possible.

Should you invest?

Before looking at how to open an Investment ISA, you should strongly consider whether it would make better sense to put your cash elsewhere, or if you are moving other investments what fees you will have to pay.

Saving for the long term?

Investment ISAs (sometimes called stocks and shares ISAs and the successor of maxi ISAs) should always be treated as a mid to long term investments and as a result shouldn't be used in an attempt to make quick gains.

There are two main reasons for this: firstly although your returns through income from shares and profits are likely to be greater than the interest you'd get from cash over the long term, any capital in an investment can go up or down in value.

Secondly the amount you pay in fees for an Investment ISA will usually negate a significant part of your returns for at least a couple of years - although this will vary depending on how much you invest and where.

This is because the most significant expense you have to pay is likely to be the initial deposit fee of around 5% of your capital, followed by annual account fees on top of this.

Happy to take a risk?

All types of investment will leave your money exposed to a certain element of risk.

This means you could get less money back than you initially invested if your account performs badly - although you can manage this to a certain extent through the type of ISA you choose or what areas of the market you decide to invest in.

Before investing, you should be happy to speculate with any money you put in an Investment ISA and accept that its value could go down as well as up.

Cash available

You shouldn't invest money that you may need to access in the near future.

It's usually recommended that you have at least 3 months pay saved in cash before you consider investing - this prevents you from having to cancel an investment if you are faced with an unexpected bill.

Remember, because an Investment ISA is designed as a long term investment it's unlikely that you'd be able to get your money out as quickly as from a cash account without losing out.

Ultimately you should only invest money you won't need to draw on in the near future and are confident that you can manage without if you weren't to profit from it.

Could it be put to better use?

If you have debts then it's unlikely that choosing to invest will make the most of your money.

Even the best return from the best stocks and shares ISA is unlikely to outweigh the amount of interest you would pay on unsecured borrowing such as a credit card or personal loan.

This means that you are likely to be better off using the money to pay off your debts instead of investing and looking again at investing once you're debt free.

For more information read our guide: Should I Use my Savings to Pay Off my Debts?.

Self select or investment fund

Once you've decided that you want to invest, the next step is to decide how much involvement you want to have.

Investment ISAs tend to fall into two main categories: self select ISAs and investment fund ISAs.

Fund ISAs

Fund ISAs leave the buying and selling of shares to a fund manager, and work by pooling money into one large fund and investing this large amount of money across a number of companies.

This means that you don't actively buy and sell shares but instead buy units or a share in an investment fund. Your money, along with the hundreds or thousands of other people's money is then pooled together and used to buy shares in a wide range of companies.

Therefore, in theory at least, you have the power of a much bigger investor and can reduce your risk by spreading your money across a wide number of markets, sectors and companies.

However, the annual fees for a fund based ISA are usually greater initially than a self select ISA as you are essentially paying the fund manager to manage your investment on your behalf.

That said, if you are a first time investor, or don't feel confident buying and selling shares then choosing an Investment ISA that operates through a fund may be the most sensible choice for you.

Self select

The big advantage of a self select ISA is that it allows you to control exactly where you money is invested and the amount of risk you are exposed to.

However, because you essentially take the reins, they do tend to be better suited to people who have some experience in managing investments, perhaps having already having bought and sold shares in the past, and a clear idea which companies they want to invest in, rather than total novices.

If you are considering a self select ISA then you will also have to be willing to monitor your returns and the markets to check how your investments are performing and make any trades if necessary.

This is even more important because as you will only be investing in fewer companies than an investment fund, you will be exposed to a greater level of risk as your money isn't spread so widely.

Compare ISAs

After deciding the level of involvement you want to have with your investment, you will have to decide exactly which type of Investment ISA you want to opt for.

Choose a fund

If you want to invest through a fund you should compare those on the market to make sure you get the account best suited to your needs.

For help choosing a fund, read our guide: 9 Steps to Finding an Investment Fund That Will Maximise Your Profit

Select a self select

In the same way as comparing the various fund ISAs on offer, if you've decided to opt for a self select ISA then you can start to compare the different investment ISAs on the market.

Check exactly what areas each self select ISA will allow you to invest in; some are restricted to certain market sectors, while others may only allow you to buy shares from UK based or European companies.

You should also check the different fees applied by the various accounts, including deposit fees, trading fees and whether the account also applies a dormancy fee if you are inactive for a certain period of time.

The level of advice and guidance you receive will also vary between self select ISAs, some may recommend investments which you have to approve or reject, while execution only account will literally leave the decision entirely to you.

You can compare of the different self select ISAs using our self select comparison table.

Swapping or transferring ISAs

If you decide that you want to move your Investment ISA at a later date then you can do this. However, you can't simply close your existing Investment ISA and deposit the money into a new Investment ISA.

In order to ensure that your tax free allowance is transferred, you need to get your investment manager or company to transfer your balance directly to your new account.

This usually involves completing an ISA transfer form which is then send to the new account provider who makes sure that the money you are transferring doesn't affect that year's ISA allowance.

If you are unhappy with your Investment ISA you can look to change your investments or switch to a different provider.

As with Cash ISAs, you are allowed to hold more than one Investment ISA but you are only allowed to pay into one each financial year.

You can, if you wish, move money from a Cash ISA to an Investment ISA without losing your tax free benefits and you can now transfer money the other way, from an Investment ISA to cash as well if you wish.

Additionally you can in some situations move existing investments within an ISA wrapper, so you get the tax benefits on the existing account, however, whether you are able to do this will depend on the type of investment account you hold.

For more help transferring your Cash ISA read our guide: How to transfer your Cash ISA.

If you're at all unsure about whether Investment ISAs would work for your finances it's important to get some Investment ISAs advice from an independent financial advisor.