ISA’s – Individual Savings Accounts

As we approach the end of another tax year on 5th April many will be mindful of the need to fully utilise their ISA allowance -  you may have heard people mention ISA’s but you’re not quite sure what they’re all about – something tells you they’re risky!

What is an ISA?

An ISA (Individual Savings Account) is a form of tax-efficient savings and investment product. Following recent changes in legislation there are now two types of ISA with which we are concerned: -

Cash ISA

A Cash ISA is a savings account, normally through a bank or building society, as well as National Savings, which effectively pays interest tax-free. Cash ISA’s are available to anyone over the age of 16.

With a normal savings/deposit account tax is deducted from gross interest and the saver receives the net amount – the current rate of tax on interest is 20%. There is no additional tax to pay for a basic-rate tax payer; a higher rate tax payer will pay an additional 20%.

With a Cash ISA though, anyone, regardless of their tax position, can invest up to £3,600 in the current tax-year to benefit from tax-free interest. The government place a limit on the amount you can invest in your ISA due to the tax-efficient nature of the investment.

Non-taxpayers – did you know?

If you are a non-taxpayer you can register to receive your interest on your bank and building society accounts gross – you need to fill in form R85 - getting your interest without tax taken off - simply complete the form for each account/institution and pass to them to amend their records.

Where can I find the best rate?

League tables are generally published in the better quality newspapers, or alternatively you can search on line at a comparison site, such as moneyfacts or any other cash ISA comparison site.

Are they instant access?

Generally, yes, but a number of products offer a higher rate of interest, or even a fixed rate, in exchange for you not making any or many withdrawals – you can normally access your money though with an interest penalty applying. Make sure you check the terms and conditions for any cash ISA you choose to invest in.

Stocks and Shares ISA’s

These are for the more adventurous investor. The overall allowance for investing in ISA’s is currently £7,200 per person per tax year. Any investment made into a cash ISA in the current tax year will count against this allowance. For example – say you have put £2,000 into a cash ISA, you are therefore able to invest an additional £5,200 into a stocks and shares ISA.

Lump Sum or Regular Contribution?

It is possible to set up both single premium and regular monthly ISA’s. If you go for the regular option this would equate to £600 per month if you spread your allowance across the full tax year.

Where can I invest?

There is an enormous choice of places to invest your Stocks and Shares ISA allowance - you could choose to invest direct into the shares of a few companies, or you could reduce the risk slightly by investing in “pooled fund(s)”.

By investing in a pooled fund, the investment manager pools your money together with the money of all the other investors in the fund, and invests the money by buying and selling shares and other assets in line with their management style. The benefit of this is that the investment manager and their team can use their investment expertise and research to invest in companies they believe are going to provide an above average return going forwards. The second benefit is that your money, through a pooled fund, will be spread over a far wider range of companies – therefore reducing the risk to your money.

You can invest either direct with a fund manager or through a “fund supermarket” – the latter option will give you access to a large choice of different funds from a wide choice of investment managers. Fund supermarkets can sometime negotiate discounts on the charges and pass these savings on to their clients.

Charges?

Yes – normally with a pooled investment there will typically be an “initial charge” which can be from 0% upwards with initial charges typically being in the region of 5%. There might also be an “annual management charge” – this covers the ongoing costs of running the investment fund. These AMC’s are typically in the region of 1% – 2% per annum – check the charges on any fund you choose to invest in prior to committing your funds.

Is there a risk?

Your money is being invested in a fund(s) which the manager will invest in a range of stocks and shares of companies, corporate bonds, gilts etc depending on the investment strategy and type of fund you choose.

I am sure you will be aware of the recent falls in world stock markets. Any fall in stock markets will be reflected in the value of your investment – so yes, you could lose some, or even possibly, all of your money. For this reason you need to ask yourself whether you are prepared to take risks with this money – and also to give consideration to the length of time you are willing to invest for – a minimum of 5 years, and preferably 10 years would be a good answer here!

Why invest in ISA’s?

The benefit of ISA’s is that they grow in a very tax-efficient manner and any income you receive from your ISA is also tax-free. In addition to this it is also possible to access the money invested if the need should arise.

Many people use their ISA allowance to save and invest for longer term goals – such as a house move in 5 or 10 years time, or to provide income in retirement, to supplement other pension income - some people prefer to invest in ISA’s than in personal pension plans due to the fact that they can access their ISA money – although that can be too much of a temptation to some people!

Summary

There are two different types of ISA and you can invest up to £7,200 in the current tax year. Once we pass 5th April you will lost your ISA allowance for the current tax year – once gone it is lost forever.

Risk Warning

With a stocks and shares ISA there is risk to your capital – the value of your investment is not guaranteed, the value of the investment, and the income from it, can fall as well as rise. You could lose some or all of your money.

If you have any comments to make on ISA’s please add them below -