From an early age, we have all been told of the importance of saving. Whether it was putting pocket money into a piggy bank, making sure we had our nest egg or even the wisdom of saving for a rainy day (when presumably you would purchase an umbrella), we have all put money aside for something. In the UK, the development of dedicated financial products known as Individual Savings Accounts or ISA accounts has allowed millions of people to dabble in wealth creation without having to break the bank.

ISAs were introduced by the government in 1999 and were designed specifically to replace the Personal Equity Plan (PEP) and Tax-Exempt Special Savings Accounts (TESSA) that had formed part of the previous government’s financial vision. The ISA was a broader stroke of the brush, encouraging savers to set aside modest sums of money by ensuring that subscription to the scheme was subject to a maximum amount of capital. Public perception was that the PEP and TESSA schemes were aimed at the middle classes; the ISA was the government’s commitment to making sure that prudent financial investment was available to everyone.

It also helped that you could purchase an ISA from institutions other than banks and building societies. The chance to compare ISAs offered through financial advisers, supermarkets and some retailers meant that the average investor was able to shop around and not be limited to purchasing an ISA through the standard high street financial institutions. Factor in the tax-exempt status of any income earned from the savings in an ISA and very soon the best ISAs were being discussed on a regular basis in the financial columns of leading newspapers.

For the first nine years of the ISA’s life, the maximum subscription per tax year was £7,000 (it was briefly raised to £7,200 in 2008), but in 2010 the limit was raised again to £10,200 with further increases in line with inflation. The change of government in the UK has not diminished the appeal of the ISA, and starting from April 6th, the ISA limits will be increased in line with the Retail Prices Index (RPI) on an annual basis.

So, how does an ISA actually work?

Since it first appeared in 1999, the ISA has been designed for the express purpose of investment and savings with the added bonus of a favourable tax status.

Two types of ISA exist; cash and stocks and shares. By limiting the maximum deposits allowed for each, the choice of ISA becomes very important but it is worth noting that it is possible to open both ISAs in the same tax year, as long as the maximum deposited over the two investment vehicles does not exceed the total subscription limit (TSL), which is £10,200 up to April 5th.

If you opt for a cash ISA, you can deposit up to half of the maximum amount of the TSL; for example, in tax year 2010-11, the cash limit was £5,100. This ISA is similar to any normal savings account, with the exception of the tax-free status, but can be used to purchase (for example) national savings products that have been designed with ISAs in mind.

However, if you decide to purchase a stocks and shares ISA, the money is put towards 'qualifying investments' which can include unit trusts, investment trusts, stock market company shares (provided they are fully listed on a recognised stock exchange), public debt securities (corporate and government bonds, debentures or Eurobonds, for example) and depository interests. This ISA allows the investor to deposit up to the maximum TSL for the tax year.

While this all seems slightly complicated, especially if you have had no previous investment experience, the actual purchase of an ISA is dealt with by ISA managers. These are financial professionals who must be authorised by the Financial Services Authority before they are approved by HMRC as an ISA manager. As with all investments that rely on the movement of financial markets, the approval of an ISA manager does not guarantee that your investment will produce a satisfactory return.

Investing in an ISA does have some additional benefits for the consumer. Apart from the fact that you do not have to pay additional tax on the income received from savings in an ISA, there is no requirement to report the existence of the ISA on a personal tax return, while the money invested can be taken out at any time (although there may be a notice period for some accounts).

So, now that you have decided to put some money aside, what is the next step?

The obvious suggestion would be to take some time to compare ISAs by talking to an authorised ISA manager. There is a lot of information that relates to these investment products and, with the effects of the recent economic downturn still being felt, it pays to spend some time researching the most attractive ISAs that will ultimately provide you with the best tax-free return on your investment.

You should be comfortable with the idea of squirreling some money away for the future. While the best ISA is not going to be a replacement for a standard pension product or state-endorsed pension, it can be a useful source of additional retirement income. ISAs are available to all UK residents aged over 16, and although those in their teens may not be thinking about the future as much as some who are on the wrong side of 40, the chance to allow money to grow without fearing the fingers of the taxman has become very attractive.