ISA is an acronym that stands for Individual Savings Account and they are designed to help the value of your money grow and they can, at the same time, also provide you with an income. There are, in fact, two types of ISA – a cash ISA and a Stocks and Shares ISA. For those of you who remember PEPs and Tessas, ISAs were brought in to replace these in April 1999.
Should you have an ISA?
As a basic rule of thumb – if you have any savings they should be in an ISA.
An ISA is basically a savings account that is exempt from tax on the interest. When you remember that the government takes 20% of any interest earned on a normal ‘instant access’ savings account, you can see why the basic rule of thumb is , yes, you should have an ISA. And – if you are a higher rate tax payer, the government won’t take 20% of your interest, they’ll take a whopping 40%.
Just as with normal savings, there are a variety of account options with ISAs too, so you can still have your instant access account, your guaranteed base rate account or your fixed rate account. It’s difficult to be prescriptive about which ISA accounts present the best savings opportunities because these change on a daily basis.
Of course, the government will never give too much away – especially in light of the current financial difficulties the Country is in, so there are limits as to how much money you can put into an ISA account. The government sets the limits each year and the period covered by that amount is April to April (so the tax year), which kind of makes sense. The limit is for the whole amount you have in ISAs – so if you have cash and stocks and shares accounts, the amount is what you can invest as a total across those accounts.
The current limit is £10,200, up to £5,100 of which can be in the form of cash. There is no cap on the amount you can have in stocks and shares so you could have the maximum amount in that type of account if you want to. Yet the whole chunk could be used for shares if you wish.
However, following Alistair Darling’s Budget announcement, if the rate of inflation averages out at the Government’s 2pc target during the next year, the ISA limit could rise above £10,400 for the 2011/12 tax year. If the target continues to be met for the foreseeable future, the limit will be more than £1,000 higher, at over £11,200, within five years.
Any savings or investments must be made by 5 April, the end of the tax year; unused allowances (or portions of them) don’t rollover; they are lost for good. So let’s add to our original rule of thumb by saying that an ISA should always be the first place any savings go.
Taking Money out of your ISA
You have just as many withdrawal options with an ISA account as you do with a standard savings account – so, if you’ve gone for an instant access type of account, it does what it says on the tin – you can have instant access to money within the account and still keep earning interest on the money that remains. However, it is vital that you read and understand the terms of your particular product – just as with any other account. The most important point to remember is that you will not be able to return that cash to the ISA – once you’ve taken it out, that’s it, no going back. So, here’s the third part of the rule of thumb, which should perhaps now be called a golden rule – never withdraw cash from your ISA unless it is absolutely essential because you will lose out on your maximum tax benefits for that financial year.
ISA – The Golden Rule
So, the main message about ISAs is this:
If you have money to save, put it straight into an ISA and leave it there.