15 last-minute ISA tips

Published by Rob Griffin on 30 March 2011.
Last updated on 04 April 2012

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If you are still unsure how to invest this year's individual savings account allowance or which type of ISA to take out, it's time to make your mind up. At midnight on Thursday 5 April the door will shut once again and any subsequent deposits will count towards your 2012/13 allocation.

But don't leave it until the very last minute. While 5 April is the official deadline, most providers will stop accepting applications before then. Providers will need processing time and, depending on how you submit your request, you may find the deadline to be two, three or even 10 days earlier than you thought.

Here's our quick guide to ISAs, the things you should consider and the deadlines you need to know.

ONE: What are ISAs?

Individual savings accounts are tax-efficient savings vehicles that were introduced by the Labour government back in 1999 to encourage more people to start putting some money away.

There are two types - cash ISAs and stocks and shares ISAs.

TWO: What is the difference between cash ISAs and stocks and shares ISAs?

Cash ISAs are effectively tax-free savings accounts that should - in theory - pay you a decent amount of interest. They are offered by a huge number of high street institutions and can be opened in branches, online or over the phone.

Since rates offered by many providers have been pretty lacklustre in recent years, the Bank of England's base rate hit an all-time low.

However, the outlook seems brighter. According to research from moneyfacts.co.uk, the average cash ISA rate is now paying 2.27% - the highest since January 2009 - a general increase that will be welcomed by millions of struggling savers.

Stocks and shares ISAs are the racier option. They invest in assets such as shares, bonds and funds, and are therefore exposed to the fluctuations of stockmarkets. This means the value of your holding can rise and fall over time.

If you want to invest in individual shares and other assets, you'll need a self-select ISA.

THREE: What are the tax benefits?

With cash ISAs all income generated is tax free. In order to achieve the same return as a cash ISA paying 2.90%, a basic-rate taxpayer would have to find a conventional account giving them at least 3.63%.

While any income generated by a cash ISA is completely tax free, the situation is not quite the same for a stocks and shares ISA, in which investments earn dividend income.

In these cases a tax 'credit' of 10% will have already been taken before it is paid to you and this cannot be reclaimed.

An exception to the tax credit rule is fixed-interest investments such as corporate bonds, where the income is derived from interest. These are totally tax-free in the same way as a cash ISA.

However, don't let this be a deterrent. You still won't have any further tax to pay on either income received or capital gains arising from your investments, so there will be nothing to declare on your annual tax return, should you submit one.

FOUR: Are there any age limits for ISAs?

For cash ISAs applicants must be 16 or over, and for stocks and shares ISAs applicants must be 18 or over.

FIVE: What is the annual allowance for an ISA?

You are allowed to put up to half the annual allowance in a cash ISA. This means up to £5,340 in the current tax year and £5,640 in 2012/13, as the allowances increase with inflation.

You are allowed to put your entire annual allowance in a stocks and shares ISA (less any money invested in a cash ISA). This means up to £10,680 in the current tax year and up to £11,280 in 2012/13. Overall, this means couples can tax-efficiently invest more than £20,000-a-year.

SIX: Which type of ISA is best for me?

Choosing between a cash ISA and a stocks and shares ISA largely depends on your attitude to risk and your financial objectives. It's sensible to avoid stocks and shares if you need to access your money in the short term. Cash ISAs are also a better choice if you don't want to take a risk with your savings.

SEVEN: How do I top up my ISA?

Topping up an ISA is simple. Providing you haven't already paid in more than the annual allowance, and the ISA provider doesn't impose any rules to prevent it, you can make an additional payment whenever you like, as long as it's within that tax year - any money put in once the tax year ends will count towards the next year's ISA allowance.

One thing to bear in mind if you have a self-select ISA is the cost of topping up. If you're buying shares you'll be charged a dealing charge each time, so you may prefer to invest larger amounts less frequently rather than drip-feed your ISA.

EIGHT: What happens if I take money out of my ISA?

Providing there are no terms and conditions to prevent you withdrawing money (as there may be on fixed-rate cash ISA), you can take money out of your ISA whenever you like.

The catch, though, is that once you've taken it out, you can't then replace that part of your annual allowance.

NINE: Is my money protected?

Yes, you're protected under the Financial Services Compensation Scheme (FSCS). If you have a cash ISA with a provider that becomes insolvent, you will be able to claim compensation for the first £85,000. For investments, the limit is slightly lower at £50,000.

Although it's unusual for an ISA provider to go bust, it's sensible to keep your savings and investments with any one firm below the compensation limits.

In addition, the FSCS protection limit is per authorised institution and not per bank; many banks come under the same umbrella, so you should spread your assets.

TEN: How do I choose my stocks and shares ISA?

This all depends on your attitude to risk and the effect that losing your money would have on your financial wellbeing.

There is a vast array of fund options from which to choose. Prospective investors can opt for virtually anything from buying into fairly safe fixed income products to getting exposure to the most gung-ho and risk-laden emerging markets.

According to Patrick Connolly, spokesperson at AWD Chase de Vere, you should not view this year's ISA as a new investment, but rather as an additional part of your overall portfolio. "It is really important that people don't make investment decisions based on short-term sentiment or hype," he says.

"Many investors have done this in the past, jumped into the latest 'flavour of the month' fund and regretted it afterwards."

In the same way, prospective investors should avoid trying to pick the funds they think are set to deliver stellar returns in the short term. "They need to be investing in funds which fit in with the rest of their investment portfolio," adds Connolly.

Justin Modray, founder of website Candid Money, agrees. "People need to invest for the long term but if they're nervous about investing in the stockmarket, the advice is not to do so because it's better to stay in cash than endure sleepless nights."

ELEVEN: Can I transfer my ISA?

Cash ISAs that were rewarding when you took them out can become less attractive over time so it is possible to transfer your cash to a more competitive account.

It's also possible to move from one ISA fund to another if it starts to disappoint. Money can be moved from cash ISAs to stocks and shares ISAs but not the other way around. Also, it needs to be transferred rather than withdrawn, as any money taken out will be treated as a fresh investment when paid into your new ISA and is subject to the annual limits.

TWELVE: What is the deadline for online applications this tax year?

The deadline for submitting your ISA application online varies from provider to provider, and it is important to contact your provider to find out what its cut-off point is.

Halifax is extending its opening hours in branches in England and Wales to 7pm from 2 April to 5 April.

Bestinvest is extending its deadline for online stocks and shares ISA contributions to 11.59pm on 5 April, and to 10am on 5 April for postal contributions.

Online fund supermarkets will also push their deadlines as far back as possible: Interactive Investor is accepting applications up to midnight on 5 April.

THIRTEEN: What is the deadline for branch applications?

For branch applications HSBC's deadline is 1 April, while YBS, West Brom and Santander all accept applications until 5 April - as long as customers have the necessary forms of identification.
Santander, however, warns that pre-booked appointments may be necessary. Northern Rock accept applications up to 4pm on 4 April.

FOURTEEN: What is the deadline for post applications?

There aren't separate deadlines for post applications, but the general rule is to allow at least two or three days for the application to be received and at least one week for it to be processed.

FIFTEEN: What happens if I miss the deadline?

If you miss the deadline your application or investment will count for the new tax year.

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