Individual Savings Accounts (ISAs) are a success story in terms of inspiring people to save because they are effectively tax-free. They are also some of the most easy-to-understand investments on the market.There are basically three options from which to choose. Cash ISAs are like a normal savings account – except that you won’t pay any tax on the interest. And just like normal accounts, they can be instant access and fixed or variable rates of interest. A Stocks and Shares ISA invests in unit trusts across a range of assets such as shares, bonds and property. For example, they may be held in a collective investment vehicle such as an OEIC (Open Ended Investment Company). The third option is that you could mix and match. You could save an amount into a Cash ISA and put the rest of your allowance into shares.
Your allowance? Well yes, ISAs are subject to an annual personal limit, but it’s quite generous. In the current tax year (2013/14) the overall limit is £11,520. There are three basic scenarios:
• You can put a maximum of £5,760 into a Cash ISA, leaving £5,760 available to use in a Stocks and Shares ISA, if you wish
• Put up to the whole amount of £11,520 into a Stocks and Shares ISA
• Invest any amount under £5,760 in cash and put the rest (up to the overall limit) into shares
The Government doesn’t allow you to carry your ISA allowance forward from one year to the next. That’s why there is always a frenetic push by the ISA providers towards the end of each tax year to encourage savers to make use of their full annual allowance before it’s too late.
That’s all pretty straightforward. Where it starts getting a little more complicated is when you come to decide which option is best for you. Cash or Shares, or both? So that’s when the advice of a qualified Financial Adviser will prove invaluable. At Brunsdon, we can advise on the whole marketplace of ISAs, but like all investment decisions, everything will hinge on your attitude to risk and future goals, and the value of ISA tax advantages will of course also depend on your personal circumstances. In addition, a Financial Adviser will be able to explain the options regarding access to your money and transfers between providers to maximise the benefits of your ISA.
And there’s an important benefit of ISAs that could arguably be the icing on the cake. There is no ‘lifetime’ limit with regards to the amount you can invest in ISAs. Think about that for a moment. An ISA, viewed as a medium to long-term savings option, could provide an additional, tax-free fund for your retirement.