What is an ISA?
An ISA (Individual Savings Account) is a tax-efficient form of saving or investment. It is tax-efficient in terms of income and capital gains tax. The actual rules are beyond the scope of this quick article but check the HMRC website for more info if needed. Basically, the are tax free in terms of income and capital gains taxes in your hands.
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 – a savings or deposit account on which interest is paid tax-free.
2. Stocks and Shares ISA – this is a an ISA which invests (normally through the investors own choice) in mutual funds (collection of shares managed by a fund manager) or directly into individual company shares.
Self-select ISAs allow you to choose your own funds and/or shares. Seek advice from an Independent Financial Adviser (IFA) if you’re not sure where to invest.
1. Up to £10,680 in a Stocks and Shares ISA.
2. Up to £5,340 can be invested in a Cash ISA with any unused allowance being available for a Stocks and Shares ISA. E.g. if you put £2,000 into a Cash ISA you can still put £8,680 into a Stocks and Shares ISA.
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 in order to reinvest it. To retain its tax-efficient status, the transfer must be conducted by the plan managers – you will lose the tax-efficient benefits if you surrender an existing ISA 🙁
If I transfer an “old” ISA does this use my current years’ ISA allowance?
No – each individual has a new personal ISA allowance on 6th April each tax year, regardless of any previous ISA investment they may have made.
Can a husband and wife have their own ISA’s?
Yes, everyone aged over 18 has there own personal ISA allowance. It is currently £10,680 for the 2011/12 tax year. Joint ISAs are not allowed.
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 “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(s) you invest in – some funds are risker than others and many investors like to have a spread of funds from different fund management companies and in different geographical sectors (e.g. UK. Europe, Far East etc…) or asset classes (technology, gold, oil etc…)
More information on the compensation schemes can be found at FSCS – please note you cannot claim on the FSCS if your plan simply falls in value due to poor fund choice or investment market conditions!!!
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!
I wrote in a previous article about the change in pension retirement age for personal pension plans from age 50 to 55.
When does the change come into effect?
This change comes into effect on 6th April 2010. You may need to take action before that date if you’re aged between 50 and 55 and wish to take pension benefits BEFORE you reach age 55.
Failure to act could mean that you are prevented from taking your pension benefits from your personal pension until you reach 55 – which could have a serious impact on any change in lifestyle you are planning on making in the next 5 years.
Newspaper article highlights opportunity to move t Income Drawdown
This article in the Daily Mail talks about this change in legislation maybe affecting up to 3 million people.
The article highlights the case of a gentleman who will be 50 on 5th April – the day before the change in retirement age comes into effect!
It mentions the option of moving to an “income drawdown” arrangement.
With an “income drawdown” arrangement your existing pension fund is moved into a new contract, tax-free cash (now known as “pension commencement lump sum”) of 25% of the fund value may be taken and the remaining pension fund remains invested and an income may be drawn from it.
This income is limited by the Government Actuaries Department and depends on a number of variables – a financial adviser can provide guidance on this should you decide to take your benefits through this route.
You don’t have to take income immediately from the income drawdown plan and most pension providers have flexible contracts.
You also have the opportunity to move from an income drawdown arrangement to an annuity at any time after commencement (known as vesting – see my article on maximising pension income in year one)
The one downside is that once you move into “income drawdown” the remaining pot will be subject to tax on death, whereas in the “prevested” personal pension plan, the fund might be held outside your Estate through a trust arrangement – you need to check with your specific pension provider to see if your personal pension with them benefits from this kind of trust arrangement.
You could consider taking your pension benefits by purchasing an annuity. An annuity is an income for life – in exchange for your pension pot (after you have taken your tax-free cash – why wouldn’t you?!) the life company will provide you with an income for life.
This route offers lower risk – once the annuity commences the life office is carrying the risk that you die before the money runs out.
However, annuities are generally inflexible but do suit many people.
It is important to take advice before making any decision.
Alternatively, like most people, you could simply do nothing – many people are not in the fortunate position to be able to benefit from taking their pensions before age 55 – but that’s a topic for another day!
If you will be aged 50 or over before the end of this tax year on 5th April 2009 AND you wish to take your pension benefits BEFORE age 55 that you contact an Independent Financial Adviser to ensure that you don’t miss out.
Act quickly as well – don’t leave it until the last minute – with postal strikes, increasing amounts of work in respect of ISA’s etc before tax year end and the generally slow speed at which pension funds move between companies you need to ensure that your IFA has a suitable time in which to understand your position, advise on the most appropriate course of action and to actually physically move the money into the new arrangement!
The whole process can take a few months – even longer depending on the pension provider.
Well ISA day has finally arrived and the contribution limits increase today for those people aged over 50 before 5th April 2010.
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.
I have been reading many articles recently about the changes in the ISA allowance and ISA limits coming about over the next 6-7 months so I thought I would summarise them in a nutshell and answer a few of the more common questions and enquiries we are receiving about the ISA limits increase in the 2009/2010 tax year.
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.
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.
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Just a quick reminder that, as of 6th October 2009, the maximum which someone aged over 50 can pay into a Cash ISA in the current tax year is increasing from £3,600 to £5,100.
(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!
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In this new feature we will answer some of the many questions we have been receiving from visitors to shrewdcookie.com. It is often said that if you ask a question chances are that many other people also want to ask that very same question.
Although we receive a large number of personal questions we have to remind you that we do not give financial advice on this website – we encourage you to visit an independent financial adviser, solicitor or accountant if you wish to discuss any particular course of action which may be prompted by an article you read on our site.
1. What are the new ISA allowances announced in the recent Budget?
The ISA limit is increasing from £7,200 to £10,200. The change comes into effect for the over 50’s from 6th October 2009 and from 6th April 2010 for the rest of the population. Of the new £10,200 limit, upto £5,100 will be allowed for Cash ISA investment, with any surplus between the amount you place in a Cash ISA up to £10,200 being available to invest in a stocks and shares ISA.
2. Inheritance Tax – who pays?
The liability for paying inheritance tax lies in the hands of the executors/administrators of the deceased’s estate. Inheritance tax is payable within 6 months after the end of the month in which the person passed away. It is possible to pay Inheritance Tax in instalments over up to 10 years – this is the case in circumstances where say the estate includes a house. There is an interest charge if you pursue this method of paying Inheritance Tax – http://www.hmrc.gov.uk/ for more details.
3. I am married to someone who was not born in this country – how does this affect our Inheritance Tax position.
Where a spouse is deemed to be non-Uk domciled then the Interspousal transfer is limited to £55,000, there in no limit to the Interspousal transfer where both partners are UK domiciled – no liability to inheritance tax on first death if you leave all your assets to your marital partner. Consult a solicitor or accountant about your own particular situation.
4. How do I get a State Pension Forecast?
To obtain a forecast of your state pension entitlement, based on your national insurance record you need to fill out and submit a form BR19 – this article – “How Much State Pension will YOU get” gives more details.
5. If I invest a lump sum now how can I easily calculate how it will grow between now and retirement?
Using the Rule of 72 – by assuming an interest rate and dividing this into 72 will tell you how long that money will take to double in value. For example, at 6% your money will double in value every (72/6) 12 years. If you had say 36 years to retirement, at 6% growth your money would effectively double 3 times. See this article for more details.
6. Can I back-date my ISA investment to use last years allowance?
No – your money needs to be invested by midnight between 5th and 6th April each year to use the ISA allowance for that tax year – there is no way to backdate an ISA investment. A case of “use it or lose it”!
7. I am a female born in 1954 – when do I get my State pension?
State retirement age for men and women is being equalised to 65 for both sexes. See this article . There is also a State Pension Age calculator provided by The Pension Service – enter some basic details and it will tell you exactly when you qualify for your State Pension.
8. Can I hold Cash in a Stocks and Shares ISA? What is the tax liability?
Yes – many providers offer a “cash park” facility whereby you can invest temporarily in cash and then switch into stocks/funds over the short term. There is the facility to receive interest on this cash held but the interest is subject to tax and a non-taxpayer cannot reclaim this tax either. See this article for more details.
9. What is the minimum deposit on a mortgage for first-time buyers?
There is no legal minimum deposit, the minimum is set by market forces – we are currently suffering from the “credit crunch” whereby lenders are being cautious about lending to people particularly with the housing market currently falling. Therefore, more and more people are being expected to make a deposit when buying their first homes – typically 10% or more is required to obtain a good interest rate product – see “5 tips for first-time buyers” for more details.
10. What is the “deferred period” on my income protection plan for?
The deferred period is the time between notifying the claim to the life office and the benefit being paid out. The plan is designed to provider a replacement income in the event of long-term absense due to illness or accident. The longer the deferred period, the lower the risk to the insurance company of having to meet a claim which therefore means a lower premium. See these article on “income protection” for more information – “Income Protection – an introduction” and “Critical Illness Cover versus Income Protection”.
These are just some of the areas we have received enquiries on in the past month. Although we cannot reply directly please ask a question and we will try to feature it in the next FAQ article next month. Add a comment below or complete this short form to contact us.
The following is a list of the Top 10 articles visited in April 2009: –
The start of the new tax year on 6th April 2009 marked the opportunity for another tranche of money to be invested in a tax-efficient manner in an ISA.
In his recent Budget, the Chancellor of the Exchequer increased the ISA allowance to £10,200 per tax year – read the above article – the devil is in the detail!
A summary of the main changes and issues covered in Budget 2009 which may affect you and your wealth.
The start of the new tax year on 6th April heralded a number of changes in rates of taxation and allowances – read the article above to see just how much more money you will pay in tax this year.
A great article introducing the time value of money as well as the principle of compoun growth and interest.
What I feel is one of the most powerful and beneficial articles of the last month – if you do nothing else this year, please read this article and make a Will.
Inheritance Tax is a tax paid by those who distrust their children more than they distrust the Government. Plan early to avoid the simplest of taxes to avoid.
Short article on the principle of cashflows – how controlling your cash is an excellent habit to form – handy Excel cashflow spreadsheet available to download as well!
Great facility allowing you to place full amount into an ISA without the need to commit to investing the full amount from day one if you are concerned about stock markets and other asset classes falling further.
An introduction to the State pension with valuable information on changes in state pension age as well as how to obtain your own State pension forecast free of charge!
The above list details the Top 10 articles published on shrewdcookie.com in the last month based on visitor data.
Instant Growth of 36.36% on Your Money
In the current investment market there is very little opportunity as far as most people can see it to make a decent short-term return on your money.
There is however a nice tool which can be used to generate an immediate return of 36.36% on your money invested.
This tool is a personal pension plan – the plan works by allowing tax-relief immediately on any contribution made into the plan. For basic-rate taxpayers, the immediate rate of relief is 20%.
For example, if an investor makes an initial net investment of £80, under PRAS (Pension Relief at Source – which is available to both employed and self-employed investors) the actual gross amount invested is £100 – the pension provider reclaims income tax of £20 from HMRC on behalf of the investor.
If the investor is over the age of 50 they can currently vest their benefits and under pension legislation can take up to 25% of their fund as a tax-free lump sum with the remaining fund providing pension income – normally by way of annuity purchase or income drawdown – or alternatively take no tax-free cash and use the whole fund invested to provide retirement income (which remember is subject to income tax.
Enjoy Discounts on Pension Funds and ISA’s – Hargreaves Lansdown
In our scenario above, the investor would probably take the tax-free cash – it is generally better to have this cash tax-free in the hands NOW rather than taxed in the hands over time although the most appropriate course of action depends on your own particular circumstances – please take suitable advice from an IFA.
In this scenario then, having made an initial investment of £80, the investor has received an immediate pension fund of £100.
By taking 25% tax-free cash they will receive back £25 (25% of the fund value) which leaves their fund valued at £75 with them having made a net investment of £55 (£80 invested minus £25 tax-free cash received back).
£75/£55 – an instant return of 36.36% on the money invested.
The investor is then free to take an income from these pension funds, normally through annuity purchase or income drawdown arrangements, but the initial gains on the money invested of 36.36% will have a corresponding increase to the level of income which the investor can take from their pension fund.
Naturally we would strongly urge you to take independent financial advice before investing in a personal pension or other investment vehicle to ensure the course of action you are taking is the most appropriate given your own particular circumstances.
Download this article as a PDF (284kb)
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.