10 things you need to know about ISAs
1. Your money will grow tax-free
The key benefit is that any money you hold within an Isa can grow without incurring a tax bill.
So the advantage here is that you don’t have to pay income tax on interest earned. There’s no capital gains tax on profits you make on stockmarket investments, and tax on dividends is capped at 10%.
2. You can deposit over £15,000 a year
There is a limit on how much you can put into Isas each tax year, but it is a generous £15,240. Most of us don’t ever hit that limit – figures from Halifax show that the average opening balance of an Isa is £10,299.
3. The sooner you invest, the better
Many of us wait until the last minute to invest our Isa allowance. Banks and investment firms do a roaring trade in March as we all rush to use it before we lose it.
But if you start using your Isa allowance from the moment it renews in April, you will make more money. Research by Nutmeg, the online wealth manager, found that someone who invests £10,000 in a medium-risk portfolio at the start of the tax year each year for a decade will be £8,000 better off than someone who waits until the last day of the tax year.
“If you’re fortunate enough to have sufficient savings to take advantage of the new tax year allowance straight away, then do so,” says Nick Hungerford, chief executive at Nutmeg. “You then start to benefit from compound returns – Einstein’s eighth wonder of the world.”
4. You can only pay into one cash Isa
With a few exceptions, every tax year you can open only one cash Isa.
But if you’ve opened yours and see a better rate elsewhere, you can transfer your money. Just ensure you comply with the transfer rules - tell the new account provider you want to transfer an existing Isa, and it will deal with moving the money and closing the old account.
You have to move all the money and close the old Isa.
In contrast, Isas you’ve held from previous tax years can be transferred without you having to move all your cash or close the old Isa.
5. Kids can have their own Isas
Everyone is allowed to have an Isa, but children have different entitlements. Up to the age of 16 a child can have one cash Junior Isa and/or one investment Junior Isa.
Throughout that time they can only have one of each, so if you see a better rate for your child’s Junior Isa you will have to transfer the whole balance and close the old account.
Children can put a lot less into their Junior Isas than adult Isas. The limit for the current tax year is £4,080.
6. Teenagers can have two Isas
Children who are 16 or 17 are allowed to have an adult cash Isa as well as a Junior Isa. That means this age group has a larger Isa allowance than anyone else.
7. New withdrawal rules are coming
From the new tax year – starting on 6 April – money withdrawn from your Isa will no longer count as part of your allowance.
Currently, if you deposited £5,240 in an Isa, you would only be able to add a further £10,000 over the tax year, even if you later withdrew that initial deposit.
But from April if you took out some of that £5,240, then your remaining allowance would go up accordingly. So if you withdrew £1,000, your remaining Isa allowance would now be £11,000.
8. Peer-to-peer lending is coming
From 6 April there will be another new Isa on the block. The Innovative Finance Isa will cover peer-to-peer lending. You will be able to lend money via platforms such as Zopa and Ratesetter without being taxed on any interest that you earn.
9 What to put in your Isa
Make sure you stay on top of the best cash Isa rates, which we update weekly.
But savers should also consider adding a tracker, such as the HSBC FTSE All Share Index fund, to their Isa, according to Patrick Connolly, a certified financial planner at Chase de Vere. “Investors should have long-term exposure to the UK stockmarket,” he says.
“The advantages of investing in a tracker fund are lower charges, little likelihood of significant underperformance and no concerns about fund managers leaving.”
Anyone looking for an actively managed fund should consider CF Lindsell Train UK Equity, says Danny Cox of Hargreaves Lansdown: “Over the past decade the nature of investing has changed dramatically.
Previous wisdom entailed allocating a proportion of your assets to key regions to create a well- diversified portfolio. But in today’s globalised world, a company’s location can be irrelevant. Investing today can simply be about finding great companies, regardless of where they happen to be based.”
This fund has “a long history of out-performance”, he says. Cox adds that the managers are “exceptional stock-pickers and the fund is an excellent way to access their best ideas”.
10 free money for first-time buyers
A new form of Isa has recently launched: the Help to Buy Isa. This is designed to help first-time buyers save up a deposit for a home.
You can put up to £3,400 into this kind of Isa in the first year (up to £1,200 opening balance then a maximum of £200 a month thereafter), then £2,400 each year after that.
As well as enjoying all the tax perks of a standard Isa, a Help to Buy Isa comes with free cash.
That’s because the government has pledged to give Help to Buy Isa holders a 25% cash bonus once they’ve saved up enough to buy a house. This bonus is capped at a maximum of £3,000.
But you only qualify for a Help to Buy Isa if you have never owned a property previously.
From April 2017, there will also be another option for first time buyers in the form of the Lifetime Isa.
This works a little differently to other Isas as there are restrictions on when you can access the money, but in return, under-40s will get a 25% top up from the government for any money you save up to £128,000. This means a maximum bonus of £32,000.
Savings can be accessed without penalty once the holder reaches 60, or if they’re buying a first home.
Savers can hold a lifetime Isa or a Help to Buy Isa, but crucially, you can’t claim the cash bonus on both so you’ll ultimately have to decide between them. The Lifetime Isa is a bit more flexible than the Help to Buy Isa, and allows investments as well as savings.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult 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.
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.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.