Want to save but don’t know your ISA from your elbow? Read on for ten important things you need to know about cash ISAs and stocks and shares accounts.
If one of your New Year’s Resolutions was to sort out your savings then you may well be considering an individual savings account – more commonly known as an ISA.
These accounts protect you from paying any tax on your returns – it’s the government’s way of trying to get us all to save a bit more.
Are you torn between a Cash ISA or a stocks and shares account? Do you know what your ISA limit?
Here are moneysupermarket.com’s ten things you need to know about ISAs.
The ISA allowance increases in April
At the moment, most adults save up to £7,200 in ISAs each year. The whole amount can be invested in a stocks and shares ISA or you can split it and put up to £3,600 in a Cash ISA.
However, in October 2009 anyone aged 50 or over was given a higher annual limit of £10,200 – of which half can be saved as cash. You need to be 50 on or before April 5 this year, to benefit from this higher allowance in the current tax year.
Come April 6, everyone’s ISA limit will increase to this amount, so you’ll be able to shelter even more from the tax man next year.
You have just a few weeks to use up this year’s allowance
Unfortunately, you can’t roll over your ISA allowance, so you now have just a few weeks to use it or lose it.
On April 6, a new tax year begins and you will have missed your chance to bank this year’s tax-free amount.
There are many different types of cash ISA
As with standard savings accounts, there are different types of cash ISA – easy access, fixed rate and regular savings – so you can choose the best account for your needs.
If you don’t want any limits on withdrawals, there are a range of easy access accounts on offer – although remember, once you’ve taken money out of your ISA you’ve lost the tax-break on that amount and can’t put it back in.
Those willing to lock their money away for a fixed period or accept other restrictions on their savings could benefit from a fixed-rate bond or notice account.
Limit your withdrawals and you’ll get a better rate
If you have a pot of emergency cash elsewhere and are using your ISA to save for the long term then a fixed rate bond could be best for you.
These accounts usually require a lump-sum payment, rather than regular contributions.
Banks and building societies benefit because they have your money for a guaranteed period, so they tend to offer higher rates than those available through an easy access account.
However, if you do put your money in a fixed rate bond and then need to get hold of it, you may not be able to or could have to pay a penalty.
You mustn’t withdraw your balance to change accounts
Perhaps you already have some savings in a cash ISA but have found a great new rate you want to move to.
Whatever you do, don’t withdraw the cash and close down the old account. Once you’ve done so, paying the balance into a new account will use up this year’s ISA allowance and, if you have no allowance left, then you won’t be able to pay it in.
Instead, ask your new account provider to transfer the balance over. Not all accounts accept transfers in though, so this is something to check when you’re comparing deals.
Higher rate taxpayers benefit even more
Unlike standard savings accounts where you pay tax on any interest you earn, interest on cash ISAs is tax-free. This gives those in the basic-rate tax band a 20% boost on their returns.
Those in the higher-rate band benefit even more as they receive 40% more interest that they otherwise would.
That’s a considerable benefit, especially as your ISA pot grows over the years and the returns become larger.
You can move your cash ISA balance to a stocks and shares account
Although you’re not allowed to move money from a stocks and shares account into a cash ISA, you are allowed to move funds from cash into stocks and shares.
So, if you aren’t sure about which option is best, investing in a cash account allows you to change your mind at a later date.
Age matters
You can open a cash ISA at 16 but you’re not allowed a stocks and shares account until you reach the grand old age of 18.
The over-50s should be able to use their extra allowance
When the rules were changed last October allowing the over-50s to invest more in their ISAs, there was some concern that fixed rate bonds and other cash ISA accounts wouldn’t allow customers to top up their balances.
However, the majority of providers have agreed to allow top ups, so if you’re in that age group, you should be able to benefit.
Some of the smaller building societies may not allow top ups and Egg has said that it will be unable to accept any additional contributions this tax year.
Consider a stocks and shares ISA if you are investing for the long term
If you invest in a stocks and shares ISA, not only does it enable you to shelter a larger amount of money from the tax man, you can also diversify into different types of asses and build a balanced portfolio. You can hold equities, bonds and other types of assets such as property and natural resources in a stocks and shares ISA. Most people do this by investing in a managed fund.
However, there is more risk attached to stocks and shares than cash because the value of your investment can fall so a stocks and shares ISA won’t suit everyone. Because stock markets fluctuate so much, advisers tend to recommend equities to those who can invest for five years or more so you have time to ride out any market downturns.
The primary reason for diversifying into different asset classes is the hope that over the longer-term you’ll achieve higher returns than if you kept everything in cash.
By Felicity King-Evans, deputy editor of moneysupermarket.com
Posted under Banking & Investment
This post is a Sponsored Article on January 18, 2010
