A saver's guide to ISAs
It is safe to say that the last two years have been a markedly difficult time for aspiring savers across the UK, who has been treated to an endless procession of low rate saving account offerings from banks and building societies alike.
Whilst this is still true to an extent, prospective savers should capitalise on the nature of individual savings accounts (ISAís), which are their best and only legitimate way of sheltering their savings and investments from the taxman.
For anyone who is unfamiliar with ISAís, they are simply a special kind of account that individuals can place their savings or investment shares into, and enjoy paying no tax on the interest they earn each year. The interest you earn is exempt from capital gains tax, and any stocks or investments you place into the account do not need to be specified to HMRC either.
Each year, individuals are given a concrete personal allowance which is the maximum amount that can be placed into the account during an April to April tax year. The current personal allowance is set at £11,520, of which you can place £5,760 into it as cash ISA, and the full total as investment savings if you desire. Obviously, you can mix and match the varying levels of cash and stocks that you place into the account, but these are the maximum brackets that can be placed for each one individually.
As such, they should be regarded as an essential acquisition for anyone who is seeking to save some money away, or alternatively someone who desires to maximise their profit from stocks and shares that they might be in possession of at present.
However, all ISA users must utilise their allowance over the course of each tax year in order to maximise its value, because your allowance cannot be carried over to the next tax year. Instead, you will receive a new allowance, which will have risen with inflation, and will begin on April 6th with the start of the new tax year.
The different types of ISAís
As with all financial products, there is a variety of ISAís that you can acquire which all function independently to be best suited to different sets of circumstances. These follow as: Fixed rate, instant access and regular saving ISAís.
Fixed Rate- Fix your money away for a specified period, during which time you cannot withdraw money from the account without forfeiting your interest or incurring a charge. Often the rates are much higher on these accounts, though your acquisition of these should be dependent on whether you believe rates will rise in the near future.
Instant Access variable- As they sound, these accounts enable you to put money in and out of your account, without usually risking the loss of your interest payments. Some of these accounts have a threshold with how much you can withdraw, or may require a notice period. The rates you receive on these vary in accordance with the Bank of England, and will tend to be lower at this time than fixed rate deals. You can get easier access with these accounts, and enjoy the flexibility of switching to a better deal if you see an offering with a higher rate.
Regular Saving ISAís-
Youíll receive a fixed rate on your interest on these accounts, but you are required to make monthly contributions in order to maintain these payments. Withdrawals are difficult, so keep this in mind when pursuing this type of account.
Things to remember
The following is some key information you should be aware of when utilising an ISA, in either its investment or cash form. These follow as:
ï You can have as many cash or investment ISAís as you like, and you can retain your old ones from the year before. However, you can only pay into one cash and one investment account per year.
ï If you put more than the personal allowance limit into your ISA, then you will not receive any tax free earnings on the money about the threshold. In some cases with investment ISAís, this constitutes a breakage of the rules and might see you lose your ISA tax free benefits.
ï If you withdraw money from your account, then decide to place further finance into it later on in the tax year, then this will eat further into your personal allowance, not extend it.
ï ISAís run with tax years, so you should look to open your account on April the 6th, in order to maximise your return up until April 5th the next year.
ï If you see an ISA with a better rate during the tax year, do not close your existing one down and take out all the money, as this will see you lose all your earnings from interest. Instead, switch supplier, and follow the standard procedure in order to retain your hard earned interest. This is subject to having an instant access account.
ï You can acquire ISAís for your children that come under the title of Junior ISAís. The current personal allowance is £3,600, though this is set to rise next month with the end of the 2013/2014 tax year.
ï You are able to convert funds from your cash ISA into stocks, shares and other investments if you wish, though remember that you cannot do the reverse of this if you want to switch back.
ï You must be 16 or over to open an ISA account and be a UK resident.
ï If you want to switch, then go onto the HMRC site and read the rules carefully, as it will have to be followed stringently in order to not risk a forfeiture of your interest payments.
What to do if you have an old ISA
If you have an old ISA, then the chances are that you are currently on a far lower rate than you could be, especially if was opened over 2 years ago.
This is because in the past, most ISAís offered by financial institutions came with an initial bonus rate, that was substantially higher than the rate that people are moved to after the bonus period comes to an end. This means that if you are aware that your ISA is relatively old, then look at the rate you are earning on your savings, and ascertain whether it is competitive in todayís market.
Most customers whose initial bonus rate period has expired are typically moved to rates of around 0.5%, which is far lower than you can get on the market at the moment. If you identify that you fall into this category, then simply start looking around for a new ISA account, and transfer your savings as soon as possible, so you can maximise your return on investment and fully capitalise on the nature of ISAís.
Remember, keep this in mind whenever you look at accounts with initial bonus rates, and act fast in the future when you know your initial higher rate period is coming to an end and switch ISA account, so that you always make the most of your tax free earnings.
Eye catching deals for your consideration
If you are someone who is currently looking for a new ISA, or has just become aware of their tax related benefits, then there are some attractive new deals on the market that are certainly worth your consideration.
Britannia Select Access Cash Isa 2- Access account that pays savers 1.75% each year on their investment. You will be able to transfer from past ISAís, though you will have to put at least £500 into the account in order to qualify for the rate. If you decide to make over 2 withdrawals over the course of the tax year, then your rate will plummet substantially to 0.25%, so be aware of this.
Furness Building Society Cash Isa 90 Issue 2- Variable rate account that pays average users 1.7% on their savings and enables you to transfer from past ISAís. You are able to acquire tiered rates which determined in relation with how much you put in. You will receive 1.6% on balances that range from £1000 to £3000 and a slightly higher 1.7% between £3001 and £9000. The highest you can obtain is on balances over £9001, in which you get 1.8% interest on your savings. If you desire to take out money from the account, then you have to give Furness 90 days notice, or you will forfeit 90 days of interest earnings as a result.
Britannia two year fixed rate cash ISA- Pays users 2.05% on their investment and enables them to transfer from past ISAís. However, you have to put the full personal allowance for cash of £5760 in order to qualify, and withdrawals can only be made with the result of losing half a yearís interest.
Yorkshire Building Society three year fixed ISA- Pays users 2.2% on their savings and you can transfer funds from previous ISA years. You must place at least £100 into the account,
Leeds Building Society five year fixed rate- Pays users 3.05%, though penalty fees apply for users who opt to leave during the fixed period. Users can acquire a quarter of their funds, without having to worry about being penalised, making it a highly attractive offer if you believe rates will stay low.
Look out for Santander and Halifax in the next few weeks, which have sent out clear signals that they intend to release saving account offerings that may be around 2%. Both are renowned for releasing products that are the benchmark in the savings market, and will certainly be worth looking at with the start of the new financial year in April.
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