How to Park your Money in an ISA
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.
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.
I found this facility useful at the end of the last tax year – I am going to buy funds as and when I identify good opportunities.