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The Lolly guide to ISAs
In our quick guide to ISAs we explain what an ISA is, how they work and why you should invest in one.
by Victoria Bischoff on Apr 07, 2011 at 10:31
It's a new tax year and you will be happy to hear your ISA allowance has now increased. But what does this mean, and what is an ISA?
What is an ISA?
An ISA (Individual Savings Account) is a tax-free savings account designed to give you 100% of the interest you earn on your investment.
Basic rate tax payers usually lose 20% of the interest they make on their savings, while higher rate tax payers lose 40%. But if you save your money in a tax-free ISA, it will act as a ‘protective wrapper’ preventing the taxman from claiming a chunk of your interest.
What types of ISAs are there?
There are two main types of ISAs: cash ISAs and stocks and shares ISAs.
Cash ISAs work in the same way normal savings accounts do. You choose if you want a fixed rate account, an easy access (or instant access) account or a regular savings account. The only difference is that you don’t pay tax on the interest you earn.
With a stocks and shares ISA you can invest in individual stocks and shares or investment funds. Any profit you make will not be subject to capital gains tax - another nice tax break. However everyone, both basic rate and higher rate taxpayers, is expected to pay the usual 10% tax on dividend earnings.
Who can save in an ISA?
Anyone who is 16 or over and a UK resident can save money in a tax-free cash ISA, though to save in a stocks and shares ISA you need to be at least 18.
How much can I invest?
As of April 2012, the ISA limit increased for everyone by £600 to £11,280 per tax year.
Of this, the maximum amount you can put into a cash ISA is £5,640, and then the remainder must go into a stocks and shares ISA.
On the other hand, you could choose to place the whole £11,280 into a stocks and shares ISA.
When should I invest?
As long as you have not exceeded the £11,280 ISA limit you can invest in an ISA at any point during the year.
However, around the end of every tax year is known as ‘ISA season’. This is the time when people are encouraged to use up their remaining ISA allowance and pick what ISA they want for the next tax year.
Investing early in the tax year is important because the longer your money accrues interest, the more money you will make.
How many ISAs can I invest in?
You can only invest in one cash ISA and one stocks and shares ISA each year.
However, you can invest in different ISAs in different years, and there is no limit as to how many ISAs you invest in over time.
Can I withdraw my money?
Yes you can. However, how easy it is to make withdrawals depends on the type of ISA you have invested in.
While with an easy access account you can withdraw your money whenever you want, some fixed rate ISAs require you to give your provider notice before you make a withdrawal. And with others you might lose some interest or your bonus if you take your money out early.
If you do want to withdraw money from your ISA it is important to understand that if you later decide you want to reinvest it, it will count against your annual ISA allowance.
For example, say you invest £5,340 in a cash ISA and then later withdraw £2,000. If you decide you want to reinvest your £2,000 later in the same tax year, you will not be able to as you have already invested your yearly limit and will therefore have to wait until the next tax year.
Can I transfer my savings?
You can move money from a cash ISA into either another cash ISA or stocks and shares ISA, but you can only transfer money from a stocks and shares ISA into another stocks and shares ISA.
You can also choose to split the money in ISAs from previous years between different providers. But the money you have saved in the current tax year must be moved as a whole.
However, it is important to remember you should never try to transfer your money by simply closing your account yourself. If you do you risk losing your tax benefits as there is a limit to how much you can save each year (see ‘can I withdraw my money’ above).
Instead, always ask your new provider to arrange the transfer for you. But be aware that not all ISAs accept transfers.
Will my savings be safe?
As of this year, under the Financial Services Compensation Scheme (FSCS) deposits up to £85,000 and investments up to £50,000 per individual per institution are protected.
This means that if you save £100,000 in one single financial institution and the bank collapses, you are only guaranteed to get some of your money back. If you split your £100,000 between two separate organisations however, all of your money will be protected.
Be aware that many of the high street’s biggest banks share the same Financial Services Authority (FSA) registration and therefore count as a single financial institution - HSBC and First Direct for example. This means under FSCS rules only £85,000 of your money in both banks combined will be protected. If in doubt contact the FSA's consumer helpline on 0845 606 1234.
How do I pick an ISA?
If you want to invest your money in a stocks and shares ISA, you are already in the right place with Citywire Money.
We have all the news and comment you need to provide you with the insight and knowledge to help you pick your investments. We're very big on tracking the performance of funds and the people who run them so check out our performance section.
At the same time, many of the funds in our carefully chosen Citywire Selection are eligible to be held in an ISA.
As for cash ISAs, there is a wide selection of ISAs available from most banks and building societies, and even some supermarkets and retailers.
To help ensure you earn a competitive interest rate on your savings it is a good idea to use price comparison websites to help you shop around and compare accounts.
More about this:
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- Financial Services Compensation Scheme
- Financial Services Authority
- Financial Services Authority consumer helpline
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by Gavin Lumsden on Apr 16, 2014 at 15:17