Individual Savings Accounts (ISAs) were introduced in April 1999 to replace old style PEPs and Tessas. Yet many people get confused, thinking of an ISA as a complex financial product, and become wary. This is wrong, it's simply a tax free wrapper into which you can place either cash or shares. This is a full guide to help you learn your ISA from your elbow.
A. If you've got any savings, or investments, you should have an ISA, simple as that. The reason? It saves tax and therefore increases returns. For seven years, whether on telly, radio or in m'book I've used the same analogy to explain ISAs. So why stop now? Here come the cakes!
A. Whether for cash or shares, an ISA should be the first stop for your savings. The way it works will depend on the type of savings you put in.
Cash ISAs.
Use a standard instant access savings account, and basic-rate taxpayers have to give 20% of the interest earned straight to the Government. For higher-rate taxpayers this leaps to 40%.
Cash ISAs are simply savings accounts where the interest isn't taxed, meaning it's incredibly rare for a normal savings account to pay more interest. For example, for a cash ISA paying 6% AER to be beaten, a basic-rate taxpayer would need a savings account offering 7.5%, while anyone on the top tax bracket would need a whopping 10%.
Just like normal savings accounts there's a variety of cash ISAs available, such as instant access, fixed rate, and accounts with base rate guarantees. For details of the daily updated best payers, read Top Cash ISAs.
Stocks and Shares ISAs.
Share based investments in various forms are ISA-able. Shares in individual companies may be placed inside what's called a self-select ISA, which are usually managed by stockbrokers.
However a more common use of the shares allowance is for collective investment vehicles like unit or investment trusts. These are pooled investments where a fund manager picks a selection of shares based on geographic or sector criteria and the value of the investment depends on the collective performance of the shares picked.
Placing these investments inside an ISA wrapper provides two tax advantages. First any profits made from share price increases aren't eligible for capital gains tax and second it enables all the tax on bonds to be reclaimed. For the cheapest way to buy Shares ISAs, read the Discount Brokers guide.
There used to be a third category, 'life assurance investment' type ISAs, but this has now been merged in with shares.
A. Over the years since their inception, ISAs have become gradually less complex. Each tax year everyone over the age of 16 has an ISA 'allowance', which sets the maximum that can be saved within the tax-free wrapper from April to April.
The current limit is £7,200, up to £3,600 of which can be in the form of cash. Yet the whole chunk could be used for shares if you wish. There are three basic scenarios:
Using the maximum cash allowance. You can put £3,600 into a cash ISA, leaving £3,600 available to fill with shares (though you obviously aren't obliged to use this).
Use it all for shares. You are allowed to invest in £7,200 worth of shares. However this leaves no room for tax-free cash savings.
- Mix n' Match. Some amount under £3,600 can be saved in cash, then the rest of your £7,200 allowance put in a shares ISA. For example, someone saving £1,200 in a cash ISA has £6,000 left to invest in shares.
Any savings or investments must be made by 5 April, the end of the tax year. Crucially, unused allowances (or portions of them) don't rollover; they are lost for good. This means an ISA should always be the first place any savings go, as after the tax year ends, any savings or investments stay within the tax-free ISA wrapper for the future, where they'll continue to earn interest.
This means it's possible to have substantial amounts invested within ISA wrappers; £7,000 per year from 1999 to 2008, and £7,200 per year after that, plus the gains made in each year.
A. A common mistake is to think an ISA needs to be held for a set length of time in order to reap the tax-free benefits. Luckily, that's wrong! Providing the rules of the individual product allow it (there's loads that do!), you can have full, instant access to your money without losing the tax benefits on the rest of your savings in the wrapper.
However, once the money's withdrawn, it can't be returned. A few examples should help clarify this:
Situation: Mr. Rich Devil invests £7,200 in a shares ISA at the beginning of the tax year.
Options: He may sell the whole investment, or part of it, at any time without losing the tax benefits, but no more may be bought inside that year's ISA wrapper.
Situation: Ms. Irma Indecisive invests £2,000 in a cash ISA at the start of the tax year
Options: She may save a further £1,600 in the cash ISA, or £5,200 in a shares ISA (or a mix of the two) before the end of the tax year.
Situation: Irma then decides she needs to withdraw £1,000 of this cash
Options: There's no problem withdrawing the money; for the time the £1,000 was in the ISA the interest it earnt wasn't taxed. However the fact she has withdrawn the cash doesn't increase her allowance at all - she can still only put £1,600 more in the mini-cash ISA, or £5,200 in the shares ISA.
A. There's nothing stopping you switching provider for cash or shares ISAs; in fact to make sure you continually get a top rate this will be essential, particularly for cash ISAs. Yet it isn't like switching a standard savings account; transferring an ISA is a technical process.
Yet as long as you abide by my golden ISA transfers rule, it should go smoothly:
"Never, ever, ever, ever withdraw money from a cash ISA!
You'll immediately lose all the tax benefits."
Instead speak to the new provider and fill out a transfer form. This will usually include a note you can send to your existing ISA company. Your new company should then sort it all out, including moving the money over for you, keeping your tax benefits in tact. As a note, transfer a shares ISA and it may be necessary to pay another initial charge.
That's the key thing to remember, but when transferring ISAs, what you can do depends on what type of ISA you want to transfer.
-
Current year's Cash ISA. You may move ALL of this to another Cash ISA, or into a Shares ISA. You cannot split it into more than one provider or ISA type.
Current year's Shares ISA. You may move ALL of this to another Shares ISA, you can't move it to a Cash ISA, or split it between more than one Shares ISA.
Past years' Cash ISAs. You may move ALL of this to another Cash ISA or into a Shares ISA, or SPLIT it between more than one Cash or Shares ISA.
Past years' Shares ISAs. You may move ALL of this to another Shares ISA, or SPLIT it between more than one Shares ISA. You may not move any of it into Cash ISAs.
Not all ISA providers will accept transfers of previous years' allowances; to see the best ones that will, read the Transferring Cash ISAs guide.
A. In the past, ISA rules were unnecessarily complicated, making savers fret about whether to go 'Mini' or 'Maxi'. From the 2008/09 tax year, this was thankfully consigned to history. Yet anyone who had savings in either of these should be aware of what happened when the terms were dropped.
Did you have Mini ISAs? These were places to hold Cash or Shares separately from each other. If you had a 'Mini Cash ISA', this has now converted into a 'Cash ISA'. If you had a 'Mini Shares ISA', this is now labelled a 'Stocks and Shares ISA'.
- Did you have a Maxi ISA? In Maxi ISAs, the two types of investments were bundled together, and bought from the same provider. Now Maxi ISAs have been abandoned, the cash element will automatically become a 'Cash ISA' and the shares element evolves into a 'Stocks and Shares ISA'.
A. Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) were the forerunners to ISAs that existed during the 1980s and 90s. Once ISAs were introduced, these began to be phased out, and in April 2008 any money left in them was moved into the ISA regime.
-
TESSAs. These were basically cash-based accounts, and between 1999 and 2004 they turned into TESSA-Only ISAs (Toisas). These have now all become simple Cash ISAs, but possibly at a rubbish rate of interest. However, all the normal ISA rules apply, meaning you can transfer and up the rate (read Transfer to the Best Cash ISAs).
-
PEPs. Any PEPS which still exist have automatically transformed into Stocks and Shares ISAs. You can continue to invest in them within the rules of normal Shares ISAs, providing you haven't used another Shares ISA during the same tax year. It's also possible to transfer funds from the old PEP into an existing Shares ISA.
If you think you had either of these investments, or a standard ISA, but are now not sure what has happened to it, it's possible to track down old accounts and reclaim the funds (plus any interest) inside them. Read the full Reclaim Forgotten Cash guide.
Ask A Question/Forum Discussion
Full ISA Guide Discussion
Always double check the product details before signing up to them
Spotted a brokenlink/out of date info? Let me know at brokenlink@moneysavingexpert.com
LINKS THAT HELP THIS SITE (all have a * in above article)
(this has no impact on product or recommendation - see explanation below)
N/a
Explanation (of * links)
LINKS THAT DON'T HELP THIS SITE
(please only use if necessary)
No * Link Available: N/a
Duplicate links of the * links above for the sake of tranparency, but this version doesn't help MoneySavingExpert.com:
N/a