Independent financial expert Harvey Jones
answers a reader’s query about making the most of their ISA
As the tax year draws to a close on 5 April, hundreds of thousands of savers traditionally rush to use their annual tax-efficient individual savings account (ISA) allowance before the deadline. It’s called the ‘ISA season’, and the rush happens every year.
Many people leave it until literally the last minute, sending an online application just before the midnight deadline.
The rush is because your ISA is a ‘use it or lose it’ allowance. If you don’t use your allowance by the end of the tax year, you have lost that year’s allowance forever. So if you have a bit of money to put aside, don’t squander it!
The appeal of ISAs lies in the fact that, in contrast to a standard savings account, any interest you earn is free from income tax or capital gains tax.
Inevitably the tax advantages mean that there’s a limit on the amount that can be invested. This tax year (ie, until 5 April), every UK adult over 18 can save up to £10,200 a year in an ISA.
There are two different types of ISA – stocks and shares ISAs and cash ISAs.
You can invest your full annual allowance of up to £10,200 a year entirely in stocks and shares, or alternatively you can invest up to half – £5,100 – in a cash ISA, and the remaining amount up to the full allowance in stocks and shares.
You can choose from hundreds of ISAs offered by almost every bank or building society.
A cash ISA is basically a savings account with an annual investment limit of £5,100 on which you don’t pay tax on the interest.
Some offer variable rates, meaning that they may go up or down over the course of the year, while others may offer a fixed rate for a fixed period, usually one or two years, if you don’t make any withdrawals during that time.
If you are happy to take on the risk of investing in the stock market, then you may choose to invest in stocks and shares.
Historically, over the longer term stock markets have performed better, giving investors a higher return.
Just remember that stock markets are very volatile. On paper you could lose money if the value of the shares you’ve invested in plunges, though you will only crystallise any losses if you sell at a lower value than you buy at.
To reduce risk, don’t invest money in stocks and shares that you are likely to need in the next five or so years.
There are thousands of stocks and shares ISAs to choose from various investment funds from hundreds of asset managers, banks and building societies.
You can choose from basic low-cost trackers that mirror the fortunes of a stock market index such as the FTSE 100, right through to specialist funds investing in the US and Europe, emerging markets such as China and India, and specialist sectors such as mining or technology.
If you’re a beginner, the choice can seem bewildering.
To keep things simple, you could stick to a low-cost FTSE 100 or FTSE All-Share tracker. If you want something a little more specialist, you should consider taking independent financial advice.
Check the charges when buying funds though. They can vary widely, from under 1% for simple Tracker ISAs to up to 5.75% if investment advice is included.
You can transfer your ISA to another provider at any point.
Make sure you follow the ISA transfer rules carefully, though, to make sure your savings don’t lose their tax-efficient status. There’s a good explanation on the HMRC website.
From the next tax year, starting 6 April 2011, the annual limits for cash and share ISAs will increase in line with inflation, as measured by the Retail Price Index (RPI). The 2011/12 tax year allowance will be £10,680, up to £5,340 of which can be in a cash ISA.
As you can see, there is plenty to think about, so whether you’re topping up an existing ISA or want to take one out before the end of the tax year get started now as that deadline is fast approaching.
As for next year, don’t leave it so long if you don’t have to. By leaving your ISA decision to the last minute, you have lost almost an entire year's tax-free saving.
- Harvey Jones is a freelance personal finance journalist who writes regularly for the Daily and Sunday Express, Motley Fool and lovemoney.com
- If you have a general financial query or dilemma unrelated to a specific financial services provider, email Harvey at email@example.com
- Harvey regrets that he cannot answer your questions individually. These are his personal views and not those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
- If you have a specific financial concern, you should always seek your own professional financial advice. All details given are correct as of 7 March 2011.
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