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

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

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

Eleventh-hour options

Brian Dennehy, managing director of online dealing hub, 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.

ISA sources

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.

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