What is an ISA?

ISA allowances are increasing from £10,200 to £10,680.

Of this £10,680, up to £5,340 can be invested in a Cash ISA, and any unused allowance between the amount you put into a Cash ISA and the overall allowance of £10,680 can be invested in a Stocks and Shares ISA.

For example, invest £2,000 in a Cash ISA from midnight tonight and you can still invest up to £8,680 into a Stocks and Shares ISA.

If you can afford to invest on a monthly basis, to benefit from pound cost averaging, the maximum each month (assuming 12 payments) is £890.

Any questions, add them below and I’ll answer them for you.

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It’s that time of year again – as the end of another tax year approaches on 5th April we are now well and truly into “ISA Season”!

Here’s a brief overview of ISAs for those new to this form of savings/investment, as well as for those who may have a few queries they need answers to.

The new “Junior ISA’s” are likely to come into force in Autumn 2011 and information on them is limited at present.

The new ISA will be a simple and tax-free way for parents to save for a child’s future – the only difference being here that there will be no contribution made from the public purse!

It is understood the ISA will pass to the child on reaching 18 so could be a good way to build a tax-efficient fund for, say, university funding, house purchase or buying a home.

Remember: everyone has a personal income tax allowance – even children. For the 2010-11 tax year it is £6,475 – so if your children currently earn interest on their savings accounts (and their income from all sources if below £6,475) then they can register to receive their savings account interest paid gross with no tax deducted – here’s an article I wrote on this issue previously.

The details are to be confirmed soon but I would expect that a Junior ISA can be rolled over into an “adult” ISA once the child reaches 18 – it’s going to be a case of “use it or lose it”.

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What is an ISA?

An ISA (Individual Savings Account) is a tax-efficient form of investment. It is tax-efficient in terms of there being no liability to income tax on any income received or capital gains tax on any gains you make.

An ISA will be included in calculating your Estate value for probate and inheritance tax purposes.

What different types of ISA are there?

There are two types of ISA:

1. Cash ISA – this is a savings/deposit account on which interest is paid tax-free.

2. Stocks and Shares ISA – this is an ISA which invests in a fund(s) which themselves invest in stocks and shares.

There are thousands of funds to choose from. Self-select ISA’s allow you to choose your own investment funds. An ISA through an IFA or other adviser can also be invested in if you are not happy to choose your own investment funds.

How much can I invest?

This depends on your age – if you’re going to be 50 or over before 5th April 2010 then you can invest:

1. Up to £10,200 in a Stocks and Shares ISA.
2. Of this £10,200 limit, up to £5,100 can be invested in a Cash ISA (with any unused allowance being available for a Stocks and Shares ISA). E.g. if you put £4,000 into a Cash ISA you can put £6,200 into a Stocks and Shares ISA.

If you’re aged below 50 then you can invest the following:

1. Up to £7,200 in a Stocks and Shares ISA.
2. Of this £7,200 limit, up to £3,600 can be invested in a Cash ISA (with any unused allowance being available for a Stocks and Shares ISA).

After 6th April 2010 everyone can invest up to the £10,200 limit.

Can I Transfer from one ISA provider to another?

Yes – approach the company to whom you wish to transfer to arrange this. Under no circumstances surrender the ISA – you will lose the tax-efficient benefits!

The ISA must be transferred between the providers.

If I transfer an “old” ISA does this use my current years ISA allowance?

No

Can a husband and wife have their own ISA’s?

Yes, everyone aged over 18 has there own personal ISA allowance.

If I take out a Cash ISA and a Stocks and Shares ISA do they have to be with the same provider?

No. You can have a Cash ISA with your bank or building society AND a Stocks and Shares ISA with a separate investment house.

Is there any risk involved?

Cash ISA – generally no – if the bank or building society were to go into “default” then you should be covered by the Financial Services Compensation Scheme (FSCS). In terms of returns, there is no volatility involved as this is purely a deposit/bank account.

Stocks and Shares ISA – these do carry risk – the level of risk will depend on the fund you invest in – some funds are riskier than others. With Stocks and Shares ISA’s you should ideally be investing for the medium to long term (minimum 5 years, preferably 10+). The value of the underlying shares can fall as well as rise, as has been seen over the last few years in the UK and world stock markets.

More information on the compensation schemes can be found at FSCS - please note you cannot claim on the FSCS if your plan falls in value!!!

If you have any comments or questions please let me know in the comments section below.

Remember though – we don’t give financial advice on this site!

There is, however, a time when a falling stock market is a GOOD thing – that’s when you’re actually putting money into the market (as I have been doing over the last couple of years).

Now I’m not saying now is the right time for YOU to invest in the stock market – we all have our own reasons for investing (or not, as the case may be). My investment strategy, time horizons, attitude to investment risk etc will probably be different to almost everyone else’s so the actions I take may not be the actions which you should take!

The stock market performed a fantastic turnaround in 2009, with the FTSE100 rising from 4,434.20 at close of trading on 31st December 2008 to 5,412.9 at close of trading on 31st December 2009 – an increase in the FTSE100 of 22.1% during 2009.

Who knows where it will go next?!

Well, anyway, as part of my broader portfolio, I bought some shares in December in Tullow Oil (TLW.L) which is an oil drilling and exploration  company with interests in the African continent as well as other geographical areas. At the time I bought them, their shares stood at £12.99 per share. I had £1,000.00 to invest and therefore was able to purchase 76 shares back in December.

There has been a certain amount of volatility in the stock market recently and today I noticed that their share price had in fact dropped to £11.62 per share – a fall of £1.37 per share or 10.55% compared to what I paid for my shares back in December.

Now many people would be unhappy about this – not me! I saw it as a buying opportunity. I therefore decided to purchase another £1,000 worth this morning.

I am in this for the long run and will possibly hold these shares for in excess of 5-10 years so I took advantage of the recent fall in price to add more shares to my portfolio and benefit from pound cost averaging.

So what does all this mean? Well, I was able today to buy these shares at £1.37 per share less than I paid for them in December. I have drawn up a spreadsheet to demonstrate the benefit to me of this course of action.

I have included the dealing costs and stamp duty (0.5% on purchases) to take full account of the trading situation. You can see from row 1 that the total cost of my purchase of 76 shares in December was £1,007.28 giving a total acquisition cost per share of £13.25. Today I bought 86 shares at £11.63 and row 2 shows the total acquisition cost of £1,019.12 or £11.85 per share. So my purchase today cost me £1.40 per share less than in December.

Now here’s the interesting bit!!!

The second half of the spreadsheet answers the question “at what price per share do I have to sell to get my money back and break-even?”

Row 1 shows that had I not bought those shares today then to recoup the £1,007.28 outlaid in December, together with the £14.95 dealing charge to sell, I would need the Tullow Oil share price to hit £13.45 (last column) – this is the break-even price for my holding as it stood prior to today’s purchase.

Now consider the next row down - because I was able to reduce the average buying cost of my two lots of shares in Tullow down to £12.51 i have “pound cost averaged” down the cost of this holding in my portfolio.

The second row shows that to recover £2,026.40 (total cost of both the purchases in December and today) together with dealing charges of £19.95 (next tier of dealing charges) I would need to sell the shares for a minimum of £12.63 per share.

So in summary, had I only bought the December shares I would need Tullow Oil share price to hit £13.45 to break even.

Now with today’s “cheaper” shares I have reduced this break-even share price down to £12.63 per share – 82 pence per share lower. In effect, each and every penny that the Tullow Oil price rises over and above £12.63 is profit to me!

This therefore gives me scope for larger gains at a later date when I ultimately sell this holding.

If the price drops even further I will consider whether to invest further funds to reduce my break-even price even further.

Warning!

This is not a recommendation to buy shares in Tullow Oil or indeed that share ownership is suitable for YOU! The value of shares and the income from them can fall as well as rise and if the company went bust I could lose all my money. Do not act on this article without first taking suitable advice from a qualified stockbroker or financial adviser. You have been warned!!

What is the current ISA position?

Anyone aged over 18 in the current tax year is allowed to contribute up to £7,200 to a Stocks and Shares ISA. If they choose, they can use up to £3,600 of this allowance to contribute towards a Cash ISA.

Any unused allowance after making contribution to a Cash ISA can be invested in a Stocks and Shares ISA.

For example, if someone currently places £2,000 into a Cash ISA, before the end of the tax year on 5th April they can either invest an additional £1,600 into their Cash ISA, and invest £3,600 into a Stocks and Shares ISA. Or alternatively, they could leave just £2,000 invested in the Cash ISA and invest £5,200 into a Stocks and Shares ISA.

What is changing on 6th October 2009?

The annual allowance for anyone aged 50 or over before the end of the current tax year is having their ISA allowance increased to £10,200. Of this £10,200 allowance up to £5,100 can be invested in a Cash ISA.

What about for those aged under 50?

For under 50′s their ISA allowance will remain at £7,200 for the rest of the current tax year and their allowance will increase on 6th April 2010 to £10,200 in line with the over 50′s allowance.

They key with any long-term investment strategy is to start as soon as possible – tomorrow is too late!

This reminded me of an article I wrote on the Rule of 72 and the Time Value of Money. The rule of 72 simply states that whatever rate of interest your money is enjoying, divide that rate into the number 72 and that is the number of years it will take your money to double in value.

For example, at 6% per annum, your money invested today will double in value after (the maths bit! – 72/6) 12 years.

So the sooner you start investing the more of these “12 year bits” you can accumulate in your lifetime.

The other benefit of starting as soon as possible is the benefit of “compound interest” – this effectively is where “money makes money”. If I invest £100 today, at a rate of interest of 5% I will have £105 at the end of the current tax year – in year 2 my amount invested is now £105 – I will earn 5% on this total amount – so in effect my £5 interest received in year 1 is now earning interest in its own right – “money making money”.

Present day investment environment

Most of you will be aware of the recent falls in world stock markets – it would be strange if you hadn’t heard about them!

Well it’s not all bad news – the only people who lose money in a falling stockmarket are those who need or have to cash in their investments. Everyone else has simply made what is known as a “paper loss” – in reality you haven’t lost anything – it’s just on paper – the only time you have made a real loss is when you cash it in.

Why is this of interest to the shrewd investor?

The shrewd investor will be the one who has continued to invest over the last year or so – on a regular basis to benefit from “pound cost averaging” – as they have been able to buy more and more shares at a lower price.

Any investment in the stock market should be viewed as a long-term strategy and I personal am looking at a minimum 10 year timeframe for each investment I make – I only invest the money if I am willing to hold that investment for 10 years.

What are the current ISA limits / ISA allowances in the 2009/2010 tax year?

In the current tax year anyone over age 18 can invest up to £7,200 in a Stocks and Shares ISA.

Of this £7,200 ISA limit, up to £3,600 can be invested in a Cash ISA, any of the remaining £7,200 allowance which remains unused can be invested in a Stocks and Shares ISA.

What is changing on 6th October in relation to ISA allowances?

From 6th October, anyone who will be aged 50 or over, before the end of the current tax year on 5th April 2010, can invest up to £10,200 into a Stocks and Shares ISA.

Of this £10,200, up to £5,100 can be invested in a Cash ISA, with any remaining unused ISA allowance being available for investing in a Stocks and Shares ISA. For example – if you invested £2,000 in a Cash ISA you could still invest £8,200 in a Stocks and Shares ISA.

What about if you will be aged under 50 by the end of the tax year on 5th April 2010?

In these circumstances, your ISA allowance will remain at £7,200 until 5th April next year,  with you being able to invest the full £10,200 from 6th April 2010 for the 2010/2011 tax year.

I have already paid some money into my ISA (up to £7,200) – can I top it up after 6th October?

This will depend on the institution you are invested with – we suggest you ask them whether they will allow you to invest the additional amount up to £10,200 (or £5,100 in the case of Cash ISA’s) after 6th October.

Under current rules you cannot contribute to an ISA of the same type with more than one provider. Therefore, if your bank/building society etc is not willing to allow the additional investment you may have the option to transfer to another provider and make the additional investment.

You need to confirm with your current ISA provider whether they will allow the top up – if not, you need to find a provider who will accept a transfer in from the current provider as well as allowing you  to top up.

Warning!

Under no circumstances should you “cash in” an ISA if your current provider won’t allow the top up, as you will not be able to reinvest this amount in the current tax year – to move money from one ISA provider to another you need to complete an “ISA Transfer form” from your new ISA provider.

And finally……

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Related Posts

Changes in ISA Allowances – Budget 2009/2010

New Tax Year – New ISA Allowance – 2009/2010

(The increase comes into effect for those aged under 50 from the start of the next tax year on 6th April 2010!)

In the last Budget, the Chancellor of the Exchequer increased the Stocks and Shares ISA allowance from £7,200 to £10,200 for those aged over 50 (before 5th April 2010) with the increase coming into effect on 6th October 2009.

Many will have already made their maximum contribution of £3,600 for the current tax year with the intention of topping it up to the £5,100 limit on 6th October 2009. There have been rumours that some organisations are not allowing the top-up to the new limit to be added to the existing ISA.

As you can only have one ISA with one provider in the current tax year it will be necessary to transfer the cash ISA to a new provider who will allow the top up.

Very Important – If you wish to transfer to another ISA provider then you must approach them first – they will provide you with a “transfer application” – once completed the new Cash ISA provider will approach your current provider for the transfer amount.

You CANNOT transfer to another ISA provider by “cashing in” your current ISA – if you have already invested money in an ISA, once you take it out you cannot put it back in!

And finally……

Be sure to subscribe to our newsletter – it’s free and you can cancel it at any time.

Also – did you know you can receive our blog posts via RSS.

Related Posts

Changes in ISA Allowances – Budget 2009/2010

New Tax Year – New ISA Allowance – 2009/2010