ISAs – Use it, or lose it

Research by the Nationwide estimates that £225 Million could be lost to the taxman as people fail to top up their ISAs.

Matthew Carter, Nationwide’s savings director, said: " people should make sure they are taking advantage of the tax-efficient savings on offer by using all of this year’s ISA allowance. Any part of their allowance remaining unused by 5 April will be lost forever. Millions of people fail to do this each year and are simply allowing their hard-earned money to line the Chancellor’s coffers."

The clock is ticking for those of us thinking of investing in an ISA and hoping to make the most of this year’s allowance. It’s a matter of days now before the end of the financial year, with April 5th the deadline, and as people begin to shop around, competition from providers is heating up.

With some excellent new offers available those with savings should really be looking to make the most of their cash by using up their tax-free allowance. But choosing the right ISA can be a tricky business with various transfer-in regulations and other strings complicating matters.

What’s an ISA?

ISA stands for Individual Savings Account and unlike other forms of investment they are tax free. They were introduced by the government in 1999 as a replacement for PEPs and are essentially a tax-free incentive to save. You can choose a cash ISA which is basically just a savings account or a shares ISA or a combination.

Currently you can invest up to £7,000 split between cash, and stocks and shares. The maximum you can invest in a cash ISA this tax year is £3,000 and all the interest you earn on the money is tax-free, but if you want to take advantage of this year’s tax break you’ll have to get your ISA set up before the 5th April.

Equity ISAs

An equity ISA is managed by companies who then put your money into stocks and shares, meaning that your money can go up and down depending how these shares perform.

The Investment Management Association has revealed that sales of equity ISAs fell by £68 million this month, but with the price of most stocks falling, now could be the time to pick up a bargain.

Cash ISAs
A cash ISA on the other hand provides a guaranteed return on your cash.

Thanks to the credit crunch, some cash-hungry banks and building societies are upping their game as the new tax year approaches, and in what has become a far more competitive environment this year, the best buy rates are paying 6.10% and above.

Park it
If you do not use up your £7,000 ISA allowance before April 5, you will lose it.
With turbulent stock markets causing concern throughout the world’s financial community the average investor might be thinking twice about investing their hard earned savings in an equity ISA.

At times like this many people leave it until the last minute to mop up this allowance, and delay their investment decisions. But trying to time the market could leave your nest-egg struggling to grow, and snap decisions forced by tax deadlines are often wrong ones.

So park your money into cash and choose your fund after the end of the tax year. You can put a lump sum into a cash fund for a while, you will only get your interest paid net, so you can’t shelter it, and there is no tax benefit to you other than you are securing your Isa allowance for this tax year.

Make the most of your allowance

Anyone looking to put money away should be thinking about their ISA allowance as it’s not often that the tax man will give you such a good deal.

Weigh up the risks involved before you invest and remember that an equity ISA should be considered at least a five year investment. If you feel more comfortable with a guaranteed cash return then be sure to choose an ISA with as high a rate of interest as possible.

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