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……

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

(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

During these bleak times of economic downturn and insecurity saving is possibly more important than ever. However, with the collapse of so many seemingly ‘secure’ banks across the globe many potential savers find themselves asking where exactly is the best place for their funds, with some contemplating whether or not the best place for their money is under their mattress!

When considering whether or not to invest funds into a bank or building society there a number of factors to consider that can help determine the strength and security of said bank or building society. Ratings known as “Fitch ratings” are attributed to each bank and building society, primarily for the use of professional investors but if you can get your hands on the rating of your bank it will give you a good idea of its strength and security. This ratings system offers a rating based on the banks available funds and ability to repay any outstanding debts, with ratings ranging from AAA (the best) through to BBB.

Once a safe house for your funds has been established it is then essential to select a savings product that offers consistent and profitable returns. Considering the current economic climate the best option may be to invest funds into fixed rate savings bonds or similar products that offers guaranteed returns. Such savings products are always a safe bet as the investor is safe in the knowledge that as long as the terms and conditions of the account are adhered to they will benefit from guaranteed returns of a fixed amount.

Savers will tend to lean towards fixed return products in times of economic downturn as opposed to investing in funds where returns are based on the performance of certain stocks and shares. It goes without saying that in the current economic climate the risk level of investing in such products is extremely high and potentially disastrous. However, this is not to say that for the more daring and speculative investor there is not a lot of money to be made. The potential returns of investing in stocks and shares are much higher than the returns gained from fixed rate products as long as the investor is willing to take a massive risk!

The ideas and opinions expressed in this article are those of the original author and may not be those of shrewdcookie.com

By managing the underlying “with-profits” fund the fund manager could “smooth” the returns enjoyed by investors by keeping back some of the profits in the good times, to allow them to continue paying bonuses in the bad times.

How do Investors benefit from a With-Profits Investment?

An investor would typically benefit from investing in a With-Profits bond in two ways.

Reversionary or Annual Bonuses

The fund manager would typically declare an annual bonus rate applicable to their with-profits fund – this would be a reversionary bonus as a percentage of the initial amount invested as well as a percentage bonus based on previous bonuses already received (a kind of “compounded return” if you like.)

The second way to benefit from investing in a with-profits fund was through the potential payment of a terminal bonus.

In recent years, with UK and world stock markets falling, the bonus rates payable have been very low; in many cases no bonus has been paid.

As a result of the size of the fall in stock markets many life companies are applying “market value reductions” to any surrender from their with-profits fund.

These Market Value Reductions can see the final surrender value cut by anything between 10% and 20% – every plan is different.

The reason for this is to protect remaining investors and to ensure that those people surrendering their with-profits investment are paid a fair amount based on their participation within the fund.

With-Profits Investments - any real future?

With-Profits funds have fallen out of favour with many professionals and investors over recent years. By their very construction they are not “open” in terms of the internal costs and charges involved in running the underlying fund – especially when compared to a “unit-linked” fund where the charges and costs involved are explicit – the investor can see exactly what the costs incurred in running the fund have been.

Another area of concern for many investors is the underlying asset allocation within the with-profits funds. Many funds have reduced their equity content substantially, taking cash and fixed interest positions. This overly-cautious approach to fund management could be to the detriment of future returns within the fund, and hence, lower bonuses.

I Want to Cash In My Investment – Can I Avoid this Market Value Reduction?

There may be a possibility to avoid this MVR on exiting the with-profits fund you are invested in. Many policies were issued with a “MVR Free” guarantee – typically this would be the 10th anniversary of the investment. Many policies offered this guarantee – it was in fact one of the main selling points which many investors may have forgotten about or were not aware of.

Every company is different – some offer the MVR free option on day of the 10th anniversary – some offer it for up to 28 days following the anniversary.

In all cases we strongly suggest that you check the policy document and other papers provided at the time you took out the investment to see what, if any, MVR free guarantees apply to your with-profits plan.

Should I cash in my with-profits investment?

Shrewdcookie does NOT give financial advice – you must take professional independent financial advice before surrendering any investment as there may be tax and charge implications of which you are not aware. The purpose of this article is to bring to your attention the possibility that you may be able to exit your with-profits investment avoiding an unnecessary penalty!

Please tell us your experiences!

We are keen to hear from people who have avoided MVR on surrendering their with-profits investment – please tell us your story below.

A share in a company is just that – you own part of the company. If it is a publicly quoted company, then yes, admittedly, your share in that company may not carry much control but you do own a share in the company with a right to attend and vote at the company’s Annual General Meeting, as well as the possibility to receive any dividend payable the company and the opportunity to make a “capital gain” is the share price increases.

When we talk about shares we are generally considering those shares in Public Limited Companies (PLC’s) which are quoted on the stock exchange or AIM (Alternative Investment Market – a market for shares in smaller companies).

How are Shares Valued?

A share is a tradable investment in a company and, as such, its price is not fixed but determined by the power of supply and demand within the marketplace.

If more people want to buy shares in Company A than sell shares in Company A, the price of the share will increase, until the number of people who are willing to sell their shares in the company matches the number of people wishing to buy shares in the company.

Conversely, if a lot of people wish to sell shares in a company, and there are too few buyers, the share price will fall – typically demand for any share will increase as the price falls as more and more people can afford to buy that share.

Why own a Share in A Company?

There are basically two ways in which a normal investor can benefit from owning a share in a company – capital growth and dividend income.

Capital growth occurs when the value of the share increases over time – many investors will review the stock market on the lookout for shares which they feel are currently undervalued, based on what they feel will be the future trading outlook for the company, and hence profitability, of the company in which they wish to invest.

For example, company X has a current share price of 90 pence – you have done your research and have concluded that company X has product Y at the research stage and when launched next year, product Y will increase the amount of money flowing into the company, with a corresponding increase in profits.

You feel that based on the information you have that the shares in Company X will be worth 130 pence in the next 12 months. You therefore buy the shares in company X today at 90 pence and hope that they will increase in value to 130 pence, at which point you plan to sell and make 40 pence profit (less any dealing costs and taxation which you might incur along the way).

Profiting through Dividends

The second way to benefit from investing in a company share is through receipt of a “dividend”. When a company makes a profit, the board of Directors will meet to discuss what proportion of the profits will be retained to help fund and grow the company, and what proportion of profits will be distributed to shareholders, in the form of a dividend, to provide the shareholder with a return on their investment.

Are there risks involved?

Yes – the price of the share is determined by the market (supply and demand) for the shares – if more people want to buy the shares than sell them the price will rise, and conversely, if more people wish to sell than buy the price will fall.

Firstly, if you buy a share in a company today for say 120 pence, there is no guarantee that that share price will be maintained at 120 pence – it could go down as well as up. All investors need to be aware of this before making an investment in a single company share – the investor needs to ask themselves “what effect on my wealth will it have if the share I am buying falls considerably in value?”.

Secondly, there is also the possibility that the company could “go bust” or cease trading. In this scenario, liquidators would be appointed to realise whatever they can from the assets of the company and to repay any debts the company owes, tax outstanding etc. Ordinarily shareholders in this respect fall way down the pecking order – it is not uncommon in the case of insolvency for the ordinary shareholders to receive just 1 penny in the pound on their investment, if anything.

Can I reduce the Risk?

Yes – if you have sufficient funds to invest you could buy a “portfolio” of shares in more than one company – by investing in a range of shares you are hedging your bets by not having “all your eggs in one basket” – some shares may rise in value, some may fall in value, some may go bust – your hope is that more of the shares will make you a profit than ones that make you a loss.

If the amount you have available to invest is rather modest then you could consider investing in a “mutual fund”. A fund manager runs the fund and takes money in from a large number of investors – the fund invests in a diversified portfolio of shares or assets in line with the investment objectives of the fund.

The investor in this scenario benefits from the active management of the fund by a professional management team as well as the ability to invest in a wide range of different companies thereby reducing the risk of their investment.

Learn more About Company Shares

“Investing in Shares for Dummies” is a great introduction to this fascinating topic. Buy now from Amazon.

Take for example a typical UK equity fund in which many people invest. There are typically two sets of charges which will be incurred in investing in such as fund:

Initial Charge

The Initial Charge is the charge applied to money at the point it is invested into the fund, sometimes also known as the “bid-offer” spread. This can range from 0% to 6% with a typical value of 5%. So for every £100 entered, you only really have £95 being invested – the effect of this is that the fund has to provide growth of 5.26% just to get you back to your original investment of £100.

Annual Management Charge

These vary depending on the nature of the investment portfolio which the investment manager is looking after. Typical values here can range from 0.5% to 2.0%. It is the annual management charge in our opinion which has the most detrimental effect on the performance of an ISA or other investment.

Consider this hypothetical scenario – you are invested in a managed fund with an annual management charge of 1.5%. Each and every year, the fund manager deducts 1.5% from the effective value of your fund. This is OK in the good years when the stock market could be showing returns of 5%, 7% etc. But in recent years with low or even negative growth, this fixed cost on your investments is even worse.

Is there a Solution?

Yes there is. By investing through a discount broker or fund supermarket not only are you opening yourself up to a very large fund choice from which to invest, you may also benefit from discounts on both “initial” and “annual management” charges.

Can these Savings be Made Just on New Money Invested?

No, many of the fund supermarkets offer the option to transfer in ISA’s and other investments from other providers to benefits from these discounts.

Naturally it would be wise to take independent financial advice before making any investment you are unsure of.