10 ISA myths
Those under 50 have an allowance of £7,200 for each tax year - of which half can be in a cash ISA - although it will rise to £10,200 in April for the next tax year.
You may have other ISAs from previous years, but the rules state that you must only contribute into one cash ISA and one stocks and shares ISA each tax year.
2. They have to be declared on a tax return
ISAs do not have to be declared on your tax return; you don't even have to inform HM Revenue & Customs you have one. Any funds within an ISA are sheltered from tax so you don't need to tell the taxman.
3. They are only worth having if you are a higher-rate taxpayer
ISAs are particularly attractive to higher-rate taxpayers because they save up to 40% tax, which they would usually pay on savings interest or income tax on investments.
Furthermore, higher-rate taxpayers are only charged 10% on dividend income instead of 32.5% incurred outside an ISA. Basic-rate taxpayers save the 20% tax they pay on normal savings interest but pay the same as higher-rate taxpayers do on dividend income.
Both groups are sheltered from the 18% capital gains tax, which is normally payable on gains of more than £10,100.
4. They are risky
Cash ISAs are as safe as savings accounts and savers will not lose their capital, unless their bank or building society defaults and the funds are not covered by the Financial Services Compensation Scheme.
Stocks and shares ISAs vary in risk, much like investing in stocks and shares outside an ISA. The best way to remain cautious is to spread the investment over a number of sectors and asset classes.
For example, don't just buy shares in Footsie companies; buy a variety of funds and trusts spanning different asset classes and regions.
5. Opening an ISA is complicated
ISAs are available through a variety of providers: banks, building societies, unit and investment trust companies, insurance firms, financial advisers, fund supermarkets and stockbrokers.
With so many options, it is a common misconception that opening an ISA is complicated, but all it requires is filling in an application form, which can often be done over the phone, online or in a branch.
6. Putting money in an ISA is better than contributing to a pension
This is a long-running debate and not likely to be settled soon. Both vehicles have tax breaks but at different times of their lifecycle. Some people prefer ISAs because the money can typically be accessed at any point.
Others like pensions because they can't be dipped into until retirement age. It's a matter of personal choice and having both could be a good compromise.
7. Transferring an ISA is a nuisance
ISAs can be transferred to another manager at any point and the new manager should be able to arrange this. Your existing ISA provider cannot stop you from moving, but they may make a charge or force you to sell any assets to be transferred as cash.
Any charges that apply will be stipulated in the terms and conditions and should be considered when shopping for an ISA.
It may also take a few weeks to complete the transfer. If you believe the delay has been unreasonable, you should contact both providers and if you are still unhappy, complain to the Financial Ombudsman.
8. There's no point putting money into an ISA outside ISA season
The 'ISA season' is the few months running up to the end of the tax year (5 April). During this period providers tend to offer better deals to entice savers and investors, so some people delay putting their money into an ISA until then.
For a stocks and shares ISA it is a good idea to set up regular payments to drip-feed your money. This way you will not fall foul of a potential depression in market values which could happen if you put all your allowance in during the 'ISA season'.
9. Teenagers can't have ISAs
If you are aged 15 or under you cannot have an ISA. However, if you are 16 or 17 you can have a cash ISA. Once you become 18 you can also apply for a stocks and shares ISA.
10. If I move abroad, I'll lose my ISA
It's true you can only open an ISA if you are resident in the UK for tax purposes. If you move abroad you won't be able to open a new one or fund an existing one. You will, however, be able to keep your ISA and still get tax relief on investments held within it.
Government employees, such as diplomats, are exempt from this. If they work overseas and are paid by the government, they may open and fund an ISA.
This article was originally published in Money Observer - Moneywise's sister publication - in March 2010
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.