I have about £75,000 in my bank account, which I’ve built up over the past few years. I know it’s not doing any good sitting there but I’m not at all conversant with investments. My bank keeps sending me messages about opening an ISA. Can you explain how they work, please?

Phil Beck of Smith & Pinching responds:

ISAs – Individual Savings Accounts – are simply savings or investment wrappers that benefit from special tax treatment. Gains on anything put into an ISA are always tax-free, as are any withdrawals.

There are two principal types of ISA: Cash ISAs and Stocks & Shares ISAs. You can put up to £20,000 per tax year into ISAs using either or both types.

Cash ISAs take the form of savings accounts with banks, building societies or other financial institutions where your money is deposited and earns interest. You pay no tax on the interest. The rate of interest will depend on the terms of the ISA: if you tie your money up for a fixed term of, say, two or five years, then you may get a better rate. However, interest rates remain relatively low and so your savings are likely to lose value over time in real terms, when you take inflation into account.

A Stocks & Shares ISA is an account that allows you to invest in a wide range of investments such as funds, individual shares and bonds, with the benefit of not needing to pay tax on your investment gains. The key thing to remember about Stocks & Shares ISAs is that gains are not guaranteed, and you could potentially lose money on your investments, but there is also the potential for inflation-beating growth.

There are other types of ISA, which are only suitable in certain circumstances. These include the Lifetime ISA which is designed for those saving either for their retirement or for their first home.

ISAs are not the only possible way in which you could invest your excess cash. You could, for example, use it to boost your pension savings, if that is appropriate for your circumstances.

This seems like the perfect time for you to put a financial plan in place so that you can make the most of the resources you have and put yourself on track to reach your financial goals at different stages of your life. I recommend that you meet with an Independent Financial Adviser to put a plan together.

Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

For more information, please visit www.smith-pinching.co.uk