Last-minute ISAs: Don't miss the deadline
Another tax year is on the way out, and millions of people around the UK are once again scrambling to make their ISA investments before the 5 April deadline.
If you haven't taken action yet, it's not too late - but you need to act now or you will lose this year's allowance.
This tax year, adults can invest up to £5,640 in a cash ISA account through a bank or building society and the balance up to a total of £11,280 in a stocks and shares ISA. You may not be able to afford that much, but in these uncertain times, there's reason to put as much into your ISA as you can, especially if you are a higher-rate taxpayer.
Interest on money held in a cash ISA grows free of income tax. So if you put £5,640 into an ISA tomorrow and leave it for 10 years at an interest rate of 3%, it will be worth £7,580. In a taxable account, your savings would be worth £7,150, or just £6,742 for a higher-rate taxpayer.
If you invest into a stocks and shares ISA, you'll pay no tax on any interest from bonds or dividend payouts from shares or funds (although dividends are automatically taxed 10% ‘at source' and cannot be reclaimed). Moreover, when you sell your ISA, there is no capital gains tax to pay on the growth.
Find the best Cash ISA or savings account for you
So which type should you choose?
Cash ISAs are safe, certainly, and an instant access ISA is a great place to keep an emergency fund, but current rock-bottom interest rates mean it's difficult to keep up with inflation at 2.7%. The box below shows five of the best instant access and medium-term fixed rates
as at 8 March 2013.
The bottom line is that, if you are putting your money away for the long term and willing to stomach the short-term ups and downs of the market, you're likely to be better off using a stocks and shares ISA and benefitting from the greater growth potential of equity investment.
As Mick Gilligan, head of research at broker Killik & Co, explains: "The real benefit of an ISA comes from the wonder of compounding, whereby saving a relatively small amount regularly over many years not only smoothes out the highs and lows of market volatility but can result in large ISA holdings."
For instance, if you invested your full £11,280 by the end of the 2012/13 tax year and then invested £400 a month into your ISA (totalling £4,800 a year) for the next 20 years, with growth averaging 7% a year, your £107,280 investment would have grown to a useful tax-free lump sum of almost £250,000.
Of course, investing into a stocks and shares ISA is likely to involve some research and decision-making. But there's no need to panic at the prospect of making such a significant decision in the next few days: various options will buy you time to make your choice. The important thing to do before the end of the tax year is simply open your account and put cash into it.
Cash ISAs: Five of the best
|PROVIDER||CASH ISA||AER||NOTICE/TERM||MIN INVESTMENT||TRANSFER IN?|
|Santander||Direct ISA Saver (Issue1)||2.5%||None||£2,500||Yes|
|Nationwide BS||Fixed-Rate ISA||2.5%||2-year bond||£1||Yes|
|Halifax||ISA Saver Fixed||2.5%||2-year bond||£500||Yes|
|Halifax||ISA Saver Fixed||3.%||3-year bond||£500||Yes|
|Cheshire BS||ISA Saver (Issue 2)||2.3%||None||£1,000||Yes|
Brian Dennehy, managing director of online dealing hub fundexpert.co.uk, says: "Options for last-minute ISA investors are very flexible, as most ISA providers have a cash facility, typically called something like cash reserve."
Once your money is in the ISA cash facility, it can remain there for as long as needed. "The strict rule is that you simply have to have the intention to invest at some point in the future," continues Dennehy.
"When interest rates were relatively high, HM Revenue & Customs (HMRC) used to ask ISA providers to explain why they had so much cash in their stocks and shares ISAs – it was assumed they were being used as surrogate cash ISAs. No one has these concerns now, as interest rates on cash in a stocks and shares ISA are typically nil to negligible."
If you're nervous about stockmarket corrections, you can drip-feed your cash into your chosen funds rather than pay it all in at once. Many companies will allow regular contributions of £50 a month per fund or trust.
Remember, you're allowed to move money out of a cash ISA and into a stocks and shares ISA any time. So it would be quite feasible to start off with a straightforward cash ISA worth up to £5,640 and transfer it into the stockmarket at a later date.
At the moment, however, with interest rates paltry and the stockmarket buoyant, it makes more sense to focus on the latter unless you're building an emergency fund.
If you don't have the cash for a lump-sum investment, but you do have some non-ISA holdings (such as shares from a building society demutualisation or employee share scheme), why not utilise your ISA allowance by transferring them into a tax-sheltered environment?
This process is known as ‘bed and ISA'. It involves selling your investments and buying them back within the ISA wrapper (so gains over the annual exempt allowance of £10,600 may be liable for capital gains tax). A broker will be able to help you, but you should contact them several days before 5 April.
Where should you buy your ISA?
For cash ISAs, you'll need to contact the relevant provider direct. Check beforehand how to open the account, as some are online only, while others can only be opened in branch or by post. For stocks and shares ISAs, it depends whether you want to invest solely in funds or in a range of assets.
If you want funds only, you could open an account with the fund manager, but you'll have to move the whole ISA if you later want to switch your fund to one run by a different investment company.
It's simpler and cheaper to go to an online discount broker or fund supermarket offering a wide selection of funds and discounting the initial 5% fee. Some, such as Cavendish Online and Interactive Investor, also rebate all the trail commission they receive from fund managers.
You might be tempted by the ready-made ISA fund packages put together by some providers to undecided investors.
Beyond funds, you can hold shares, investment trusts, ETFs and bonds tax efficiently in a self-select ISA (available through online and conventional stockbrokers such as TD Direct Investing).
Don't forget to review existing ISA investments every six months or so. If you're not happy with performance, or if your holdings no longer meet your needs, it's quick and easy to switch to another fund if you're invested through a broker or fund platform. Typically, you'll pay 0.25% of the fund value. You can do this at any time.
Deadlines for your ISA
The deadline for applications, however you apply, is close of business on 5 April, so postal applications need to be posted in plenty of time.
Many ISA providers stay open very late to cater for last-minute investors, so check beforehand. Interactive Investor, for example, will be accepting applications online and over the phone right up to midnight. Remember you will need cleared funds in your current account and a debit card to open an account online or by phone.
Credit cards cannot be used to open an ISA.
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.
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.
Sometimes known as a trading ISA, a self-select ISA gives investors full control over which assets to include in their ISA, allowing them to choose individual shares and bonds rather than investment funds. Aimed mainly at experienced investors and subject to the same investment limits of a regular ISA, a self-select ISA will usually be managed by a stockbroker on an investor’s behalf.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.