One of our suggested Financial New Year’s Resolutions for everyone this year is to make sure that you are paying into an ISA and, if possible, using up your yearly ISA allocation.
These tax efficient savings vehicles have been around since April 1999 and are a great way to save and invest but many clients still have queries about them. We’ve put together the following answers to common questions, to help you understand ISAs better in the run up to end of the financial year, when your chance to use your 2013/2014’s allocation ends.
1. Exactly what is an ISA?
An ISA is a ‘wrapper’ that’s designed to go round an investment, making it more tax efficient. There are two types of ISA; Cash ISAs and Stocks and Shares ISAs. Cash is like a normal deposit account, except that you pay no tax on the interest you earn. Stock and Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your returns.
2. How much can I contribute?
For the tax year ending 5th April 2014, the maximum level is £11,520 per individual (so a husband and wife could contribute £23,040). The maximum that can be contributed to a Cash ISA is £5,760. But there is no limit on the Stocks and Shares ISA, so if you only contribute, say, £3,000 to your Cash ISA, then you could contribute up to £8,520 to your Stocks and Shares ISA.
3. What are the crucial dates?
The ISA limits apply to a tax year – so the current allowance applies to the tax year running from 6th April 2013 to 5th April 2014. The next tax year starts on 6th April 2014 and the overall ISA limit for that year will rise to £11,880. It’s important to note that your ISA allowance cannot be carried forward from one tax year to the next.
4. Can children have an ISA?
Children aged 15 or under cannot have a Cash ISA, though there are other ways for them to save depending on when they were born. They become eligible for Cash ISAs at the age of 16 and 17, when they can have a Cash ISA, with the same limits as an adult.
5. Are the returns guaranteed?
Some ISA providers guarantee their interest rates on Cash ISAs but the return on a Stocks and Shares ISA cannot be guaranteed, and you could get back less than you invested. As with all forms of investment it makes sense to take advice from an independent financial adviser, and Stocks and Shares ISAs should be seen as a medium to long term investment.
6. I’ve heard people say ISAs are better than pensions: is that right?
No, not necessarily. ISAs and pensions are entirely separate and both can, and most likely should, play a part in your financial planning. The best idea is to talk to us about your long term financial goals, and we’ll discuss the advantages and disadvantages of both ISAs and pensions and help you decide on what’s best for you.
7. My ISA was with XYZ Building Society last year. Do I have to stay with them this year?
No, absolutely not. You can have a different ISA provider every year if you so choose. For Cash ISAs, it obviously makes sense to choose the provider who’ll give you the best rate of return, and for a Stocks and Shares ISA, you’ll naturally want to consider the past performance of the provider (although it’s no guarantee of the future returns) and the range of funds offered.
8. I have ISAs with several different providers. Can I consolidate them?
Yes, you can – and you won’t lose the tax ‘wrapper.’ Many previously attractive savings accounts cease to have a good rate of interest and naturally some Stocks and Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.
9. Can I save regularly in an ISA? I prefer saving on a monthly basis.
‘Yes’ is the simple answer to that question. We’ll happily advise on which providers accept monthly savings.
10. Someone mentioned ‘re-registering’ an ISA. What does that mean?
Some clients are now choosing to keep track of their investments via what’s known as a ‘wrap.’ Essentially this means that investments with different companies and/or investment groups are brought together under an overall ‘wrap’ for ease of administration. If an ISA is included in this type of arrangement it will need re-registering to the wrap provider. The underlying investment doesn’t change.
If you’d like any further details or advice on your current or planned ISA investments or you have any other questions, then as always, don’t hesitate to contact us.
The value of investments and the income from them can go down as well as up and you may get back less than you originally invested.