Ten Minute Tip - ISAs
Don’t let the jargon fool you! ISAs are incredibly easy to understand and should be an essential part of your savings plan.What is an ISA?
ISA stands for Individual Savings Account. As the name suggests it’s a means to save money, but what’s great about an ISA is that it’s totally tax free. Unlike other bank accounts or investments, any money you make – either from interest, dividends or capital gains – is not subject to tax.
What are the different types of ISAs?
There are two main types of ISA – a cash ISA and an investment ISA. A cash ISA is similar to a bank account. If you’re under 50, you can put up to £3600 of cash in a year, if you’re over 50, you can invest up to £5100. As we’ve mentioned, the interest gained from the money will be tax free. From April 6 this year, the limit will rise to £5100 for everyone.
An investment ISA covers a range of different investments, but the most popular are shares, investment funds, investment trusts and corporate bonds. Those under 50 can put £7200 a year in to an investment ISA, with the over 50s able to put away £10,200. From April 6, the limit will rise to £10,200 for everyone.
Investors can hold both a cash and investment ISA, but cannot have more than a total of £7200 invested. For instance, if a saver has already put away £3600 in a cash ISA in one tax year, they can only contribute £3600 to their Investment ISA.
The £3600 and £7200 limits must also be heeded when taking money out of the ISA. If you’ve maxed your ISA allowance and then decide to take some money out, you cannot put the money back in – you’ll have to wait for the next tax year.
Which ISA is right for me?
Firstly, are you saving for the long or short term? If you’re putting money away for a holiday or a car, a cash ISA may be the one for you. There’s very little risk, which means the value of your money isn’t going to fluctuate with the price of stocks or a market index like the FTSE.
If you’re putting money away for the long term and won’t need access to it in the next five years or so, an investment ISA could be for you. As shares have historically outperformed the interest of bank accounts, putting your money to work on the stock market may be for you. Naturally, this strategy is more risky as the markets can go down as well as up.
How do I choose an ISA?
The rates of interest on cash ISAs differ wildly. Similarly, management fees of investment ISAs can also affect the money you put away, so shop around and do your research. Price comparison sites are a good start, as is the financial press and the business/money sections of many daily papers.
Further reading
Moneysupermarket.com
Money Saving Expert
The Motley Fool