Is the Best Place for Your Savings in an ISA?

In case you haven’t already taken care of starting an individual savings account (ISA), you should be advised that this is absolutely the best time of year to begin one. That’s because the government increases the amount you can save beginning every 6th April. ISAs allow you to choose whether you invest in shares or funds or choose to create a cash ISA fund. The current year’s limit on savings in these types of funds is limited to £11,280. Consider the basic differences between these two types of funds:

Cash ISA Accounts

For the 2012-13 year beginning 6th April, you can invest up to £5,640 or half of your total amount in a cash ISA. You won’t have to pay any tax on the interest you earn on your ISA accounts. Whatever interest rate you secure for your funds, those taxed at the basic rate will avoid paying a 20 percent tax on that interest. Those who pay taxes at the higher rate realise a savings of 40 percent on their interest earnings.

• If you ever withdraw cash from your ISA, you will not be permitted to deposit funds for the remainder of the tax year ending 5th April. Also, you will pay a penalty for your withdrawal.

• ISA accounts offer interest paid at both fixed and varying rates. The interest on standard cash ISAs most likely will fluctuate throughout the year, so it’s important to keep track and be certain your interest earning rate hasn’t dropped to a non-competitive rate. If this does happen to you, then you can switch your savings to another ISA provider, but not until the new tax year begins.

• You can also look for ISA providers that guarantee to pay a specific interest rate for a given period of time, usually six months to three years, but you can never make withdrawals for any reason, even if you pay the penalty.

• You can only pay cash into one ISA per year. However, you can transfer some or all of your cash from older cash ISAs into new ISAs in order to earn a higher interest rate. Such a transaction might occur, for example, if last year’s ISA provider cuts his interest rate and you want to take advantage of a better rate elsewhere. Check with your original ISA provider to see if you are incurring any penalties by moving money, as might happen with a fixed-rate ISA. The cash must go from fund to fund; you cannot carry it across town, and the transfer must be effected within 15 days. Also, while you can transfer cash into a stocks and shares ISA, you cannot transfer stocks and shares into a cash ISA.

• If you simply maintain a general savings account, then you know you are paying taxes on the
interest earned back to the government. Some people choose those because they like to withdraw their money whenever necessary, and they say that if they have only £1,000 they won’t earn much interest anyway. But the steps to open a savings account are the same for both a regular account and a cash ISA, so why not take a chance on the cash ISA?

• Some cash ISA providers accept cash from investors and put it into money market funds, which normally pay at a higher interest rate; but you will pay a management fee for such accounts. It’s always important whenever you open any kind of savings account to find out what all your fees will be.

Stocks and Shares ISAs

Besides the money you put into a cash ISA, you are permitted to invest the remainder of £11,280 into an ISA devoted to shares, bonds or similar funds. For example, if you put £2,000 into a cash ISA, you can invest the remaining £9,280 into ISA investments. Keep in mind that if you have any types of interest-producing investments, you can move them into the shelter of the ISA investment fund so that you are protected, as long as you don’t exceed the total allowable £11,280 contribution.

• If you invest your money into an ISA dedicated to stocks or shares, neither your interest nor your dividends will be taxable.

• Money from prior years’ savings can be transferred from cash ISAs to share fund ISAs without
affecting your limit on the current year’s contributions. As stated above, you cannot transfer value from stocks and shares ISAs into a cash ISA.

• If you have a stocks and shares ISA from a prior year, you can move other investments into it as long as no cash is contributed. This would benefit someone who had an active account from a prior year with a higher interest rate than what is currently offered.

• People who have a longer time until retirement prefer the higher interest rates payable through most stocks and shares ISA. Keep in mind that the higher rates come attached to higher risk, and so stocks and shares ISAs generally work better for long-term investment periods.

Junior ISAs

Anyone 16 years or older can open up a cash ISA fund, but only those 18 years or more can open a stocks and shares ISA. Keep in mind that Junior ISAs offer savings programs for children under age 18 as long as they do not already hold a Child Trust Fund (CTF) account. The contribution cannot exceed £3,600, and cash withdrawals generally are prohibited. Why not get everyone in the family started on the path to savings, right now?

Read More About It:

DirectGov, Savings and Investing With ISAs, at http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/ISAsandJuniorISAs/DG_4016062

DirectGov, Junior ISAs, at http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/ISAsandJuniorISAs/DG_199672

Martin Lewis’ MoneySavingExpert.com at http://www.moneysavingexpert.com/savings/cash-isa-transfers

Rosie writes on behalf of a number of businesses throughout Devon and Cornwall including Drummond LLP. Drummond provide payroll in Plymouth as well as bookkeeping and other accountancy services.