How do I Choose the Best Investment Trust ISA?

An investment trust ISA is a type of Individual Savings Account, a form of investing and saving in the United Kingdom that carries tax benefits. The ISA should not be confused with the IRA, a tax-beneficial form of saving for retirement in the United States. The investment trust ISA allows the funds to be invested in a range of financial products, meaning it carries a degree of risk. An investor therefore needs to be confident with the degree of risk in a particular ISA and the ability of those running the trust to make skilled investment decisions.

The ISA launched in 1999. Originally it was available in a wide range of formats depending on the amount the person wanted to invest, the type of investment, and any investments a person had in previous tax-free plans, but since 2008 there is only one type of ISA. An investor is allowed to invest up to a maximum amount, which for the 2010/11 tax year was £10,200 (United Kingdom pounds sterling), and rises in line with inflation each year. Though there are some technical exceptions, the principle of an ISA is that any income it produces, whether through interest, dividends or capital gains are tax free.

An ISA investor can put up to half of the annual ISA limit into a cash ISA, which is effectively a tax free savings plane and produces a guaranteed income. The investor can put any amount up to and including the annual limit into investments, know colloquially as a "stocks and shares" ISA. Although the amount put into cash ISA cannot be more than half the individual's annual ISA limit, the actual amount the person puts into the "stocks and shares" ISA can be more than, less than or equal to the amount put into the cash ISA.

In theory, an individual can manage the investments made through his or her ISA. In practice, most people choose to put the money into an investment trust ISA. This is where multiple ISA investors use their money to buy units in an investment trust, which takes the form of a company that exists solely to buy and sell stocks and other securities. Any gains made by this buying and selling are considered company profits, but all of these profits are distributed to investors as dividends.

Choosing an investment trust ISA is therefore similar to putting money into an investment trust that does not carry tax free status. Investors need to carefully research the experience and record of the people that will make the buying and selling decisions for the trust, while remembering that past performance does not guarantee future results. It's also important to be clear about the balance of risk and reward that the trust is designed to target. Another point to look out for is whether the trust requires a lump sum payment or allows savings plan-style regular payments.