In light of one of the harshest budgets in years in June this year, there has never been a better time to ensure that your savings are working as hard as they can for you. The Individual Savings Account (ISA) is one of the best value savings standards available, offering a generous return on your investment. Better still, ISAs are exempt from income and Capital Gains taxes. William Hunter’s from his Edinburgh Practice, offers his expert advice on how to get the most out of your ISA.
It’s a Great Time to Review Your ISA Investments
The Individual Savings Account (ISA) has been with us for more than ten years – and new measures came into effect this April make this trusted savings standard greater value for investors than ever before.
People over 50 have already been free to take advantage of the new measures introduced at the last Budget. And now, all remaining ISA eligible investors can join in.
Savers are able to invest a maximum of £5,100 instead of the previous £3,600 in a cash ISA and £10,200 in a stocks and shares ISA or transfer previously contributed ISA years from cash to a stocks and shares ISA (please note, it is not possible to transfer a stocks and shares ISA to a cash ISA).
ISAs represent one of the most tax-efficient way to save and invest for the future (please note that the favourable tax treatment of ISAs may not be maintained and may be subject to future changes in legislation). And their tax efficiency and flexibility has even greater value as taxes rise across the board. They are easily accessible, withdrawals are paid with no tax liability, they are a useful short or medium term account for cash, and offer an easy route to the equity markets.
But it is important to make use of your annual allowance as ISAs offer a generous tax break. If you don’t use it, you lose it – and surprisingly, millions of savers fail to take it up. Those savers over the age of 50 who have made full use of their annual allowances every year since they were introduced will have sheltered £80,400 from HMRC (Source: Moneysupermarketing.com April 2009).
The tax savings offered by ISAs are significant. For those paying tax at the basic rate, you would usually pay 20% tax (2009-10) on savings interest, while higher rate taxpayers would generally pay tax at 40%. People who pay the ‘saving rate’ of tax for savings would pay 10% tax on savings interest.
Their tax efficiency makes ISAs the firm foundation of any long term investment plan.
Furthermore, the rules for investing in them are relatively simple. They are available to almost anyone who is 18 years of age (16 for a cash ISA) and a UK tax resident.
So with the new allowances now available to everybody, now represents an excellent time to review ISA investments. With the current low level of interest rates, it is important for people to consider the suitability of their existing cash and stocks and shares ISAs.
For people looking at the long term, equities historically outperform cash although the last two years have shown us that they can be volatile too. So while a stocks and shares ISA is generally the better option over the longer term, cautious investors or people looking at the shorter term may prefer a cash ISA.
The flexibility of these investments allows people to transfer cash ISAs to another ISA manager, either into another cash ISA or a stocks and shares one. Stocks and shares ISAs can be transferred to another ISA manager, but only into another stocks and shares one – you can’t transfer stocks and shares ISAs to cash ones.
Investors can transfer some or all of the money saved in previous tax years – as well as the current one – without affecting their annual ISA investment allowance. These transfers must be the whole amount saved in that tax year in that ISA up to the day of the transfer. This can be from cash ISA to cash ISA, or cash ISA to equity ISA.
It is important to design a diversified portfolio tailored to your individual needs and attitude to risk. Investors can select funds with the aim of achieving growth, income, or a mixture of both. Although investors can withdraw some or all of their money whenever required, it is important to remember that investments are made with a view to achieving growth over the medium to long term.
To receive a free guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, contact William Hunter of the St. James’s Place Partnership on 0131 303 0004 or email william.hunter@sjpp.co.uk
