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!

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.

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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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……

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Related Posts

Changes in ISA Allowances – Budget 2009/2010

New Tax Year – New ISA Allowance – 2009/2010

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.

Many people are concerned about the current state of UK and world stock markets, together with other investment asset classes, yet they would still like to utilise their ISA allowance for the future tax-efficient benefits which an ISA investment can provide.

There is a solution.

At present it is possible to invest up to £7,200 into a Stocks and Shares ISA, with up to £3,600 of this limit being allowed to be held in a Cash ISA – with the balance available to be placed into a Stocks and Shares ISA.

For example, if you invested £2,000 into a Cash ISA in the current tax year, you would still be able to invest £5,200 into a Stocks and Shares ISA.

Following the announcement in the Budget today (22nd April 2009) by Chancellor of the Exchequer, Alistair Darling, the ISA limit will increase from £7,200 per year to £10,200 per year total (which can include up to £5,100 in a Cash ISA) for those aged over 50 on 6th October 2009, and with the remainder of the eligible population being able to invest £10,200 from the start of the next tax-year on 6th April 2010.

Many people would like to invest their full allowance within an ISA but are concerned with continuing stock market volatility and econnomic uncertainty over the short to medium-term.

Many ISA providers are acutely aware of the concerns which investors have at present in placing their money into equity and other asset classes. They are therefore offering a “cash holding” or “cash parking” facility whereby an investor can place money into an ISA today, thereby securing their entitlement to their ISA allowance and deferring their investment decision to a later date when they may feel more confident about economic conditions and stock market outlook.

The money held in the “cash park” of a Stocks and Shares ISA may receive interest (see below regarding tax position).

Important Points to Note

Any money held as “cash” within an ISA is a temporary position as the Inland Revenue expect you to ultimately invest these funds into funds. The cash fund may receive interest whilst the funds are held as cash – this interest will be subject to 20% taxation – which is in line with the tax position on interest received from a bank/deposit account.

The main difference here though is that this tax is not reclaimable by a non-taxpayer.

No Cash in a Stocks and Shares ISA

It is also important to remember that regulations do not currently allow a “cash” fund to be held under a Stocks and Shares ISA – therefore any decision to invest cash into this type of ISA must ultimately be made with a view to investing in mutual funds at a later date.

Conclusion

This is a useful facility for those people wishing to invest in an ISA but not wishing to commit their funds to a fund carrying risk in the current economic and investment climate.