Christmas is over for another year, which means it's not long - hopefully - before the first signs of Spring appear and we start to turn our attention to the end of the financial year. For many investors and savers this means making sure they contribute to an Individual Savings Account (or ISA, as they're more popularly known).
These tax efficient savings vehicles have been around since April 1999 but many clients still have queries about them. To help you understand ISAs better in the run up to end of the financial year, we've answered the ten questions we're most commonly asked.
1. Exactly what is an ISA?
An ISA is a 'wrapper' that's designed to go round an investment, making it more tax efficient. There are two types of ISA; cash - and stocks and shares. Cash is like a normal deposit account, except that you pay no tax on the interest you earn. A stock and shares ISA allows you to invest in equities, bonds or commercial property without paying personal tax on your returns.
2. How much can I contribute?
For the tax year ending 5th April 2013, the maximum level is £11,280 per individual (so a husband and wife could contribute £22,560). The maximum that can be contributed to a cash ISA is £5,640. But if you only contribute, say, £3,000 to your cash ISA, then you could contribute up to £8,280 to your stocks and shares ISA.
3. What are the crucial dates?
The ISA limits apply to a tax year - so the current allowance of £11,280 applies to the tax year running from 6th April 2012 to 5th April 2013. The next tax year starts on 6th April 2013 and the overall ISA limit will rise to £11,520. It's important to note that your ISA allowance cannot be carried forward from one tax year to the next.
4. Can children have an ISA?
Yes, they can. At the age of 16 and 17 they can have a cash ISA, with the same limits as an adult. Some children - those born before September 2002 or after January 2011 - will also qualify for a Junior ISA with a limit of £3,600 per year. Children born between September 2002 and January 2011 can't have junior ISAs: they have the Child Trust Fund.
5. Are the returns guaranteed?
Some ISA providers guarantee their interest rates on cash ISAs but the return on a stocks and shares ISA cannot be guaranteed, and you could get back less than you invested. As with all forms of investment it makes sense to take advice from an independent financial adviser, and stocks and shares ISAs should be seen as a medium to long term investment.
6. I've heard people say ISAs are better than pensions: is that right?
No, not necessarily. ISAs and pensions are entirely separate and both can, and do, play a part in our clients' financial planning. Some clients prefer the simplicity of ISAs, but they don't attract tax relief on your contributions like pensions do. The best idea is to talk to us about your long term financial goals, and we'll discuss the advantages and disadvantages of both ISAs and pensions, and help you decide on what's best for you.
7. My ISA was with XYZ Building Society last year. Do I have to stay with them this year?
No, absolutely not. You can have a different ISA provider every year if you so choose. For cash ISAs it obviously makes sense to choose the provider who'll give you the best rate of return, and for a stocks & shares ISA you'll naturally want to consider the past performance of the provider (although it's no guarantee of the future) and the range of funds offered.
8. I have ISAs with several different providers. Can I consolidate them?
Yes, you can - and you won't lose the tax 'wrapper.' Many previously attractive savings accounts cease to have a good rate of interest, and naturally some stocks and shares ISAs don't perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We'll be happy to talk you through the advantages and disadvantages of doing it.
9. Can I save regularly in an ISA? I prefer saving on a monthly basis.
'Yes' is the simple answer to that question. We'll happily advise on which providers accept monthly savings.
10. Someone mentioned 're-registering' an ISA. What does that mean?
Many of our clients are now choosing to keep track of their investments via what's known as a 'wrap.' Essentially this means that investments with different companies and/or investment groups are brought together under an overall 'wrap' for ease of administration. If an ISA is included in this type of arrangement it will need re-registering to the wrap provider. The underlying investment doesn't change.
So there are the ten questions answered. If you'd like any further details, advice on your current or planned ISA investments or you have any other questions, then as always, don't hesitate to contact us.