- By Malcolm Anderson
- Published 02/21/2012
ISAs are an excellent savings vehicle since they carry the significant bonus of having an annual tax-efficient allowance applied to your money.
The following guide will give you an easy overview of ISAs and their benefits, as well as explain what your ISA allowance 2012 will entail.
In a nutshell, Individual Savings Accounts (ISAs) are the tax-efficient savings plans that replaced PEPs and TESSAs in April 1999. They’ve grown in popularity over the years for the tax advantages they offer – recent figures show that more than one in three adults in the UK now own one. Please do remember, the eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.
ISAs allow you to minimise the tax you pay on your savings and effectively invest your money. An ISA itself is not an investment however, it’s an account or wrapper that you can shelter your investments from tax in. The value of investments can go down as well as up and you may get back less than you invested.
These types of savings accounts are also convenient in that there are no charges to open one – the only fees you will pay arise from the investment funds you choose. While ISAs have no fixed investment period, to get the most from them they are best looked at as a long-term saving solution.
There have been changes in government legislation which affect the way the ISA allowance is calculated. ISA allowances are now increased each April in line with the Retail Prices Index (RPI),. Any increase to the RPI will apply to the ISA allowance for the following tax year, but if the annual RPI is negative, the ISA allowance for the following year will remain unchanged.
From the start of the new tax year, on 6 April 2012, the annual ISA allowance will be raised from £10,680 in 2011/2012 tax year to £11,280. You can invest this entire sum into a Stocks & Shares ISA, or place up to £5,640 of that allowance into a cash ISA in the 2012/2013 tax year. Also see the below section which further explains the difference between Cash and Stocks & Shares ISAs.
Summary of ISA Advantages
ISA savings vehicles carry significant benefits:
· Tax-efficient savings – the money you invest in an ISA will be tax advanteaged up to the annual ISA limit. You can also double this allowance if your spouse also invests in an ISA.
· No income tax – the revenue you receive from holding bond funds in an ISA will be free from income tax. This is particularly beneficial if you’re a higher-rate taxpayer.
· No capital gains tax – this applies regardless of how much your investment funds grow over time.
Different ISA Options
Both Cash ISAs and Stocks & Shares ISAs have their advantages – at the end of the day, the right choice will depend on your individual financial situation.
As mentioned above, the maximum allowance for saving your money in a Cash ISA is £5,640 from the start of the new tax year in April 2012.
This type of ISA is the safest investment option, since it is a simple saving account. Plus, unlike Stocks & Shares ISAs, your money will not be subject to the fluctuating the stock market.
Some Cash ISAs will allow for fast access to your money at short notice, while others will locks away your funds for a set length of time.
A good instant access ISA will usually carry rates of around 2-3%, whereas a fixed-term ISA typically offers around 3-%. Thus, if it’s the best return on your savings that matters most to you, go for a fixed-term ISA. If however it’s important to you to be able to have easy access to your money if you suddenly need to release funds, then you could consider an instant access ISA.
Stocks & Shares ISAs
Also called Investment ISAs, these allow you to invest your money in shares and bonds that are quoted on global stock markets. While Stocks & Shares ISAs are more risky than Cash ISAs because they’re subject to the rises and falls of the stock market, they have the potential for delivering much healthier returns.
These types of ISAs carry varying amounts of risk however, depending on the investments you choose. If you’re new to the game, it’s a good idea to follow the advice of an Independent Financial Advisor
Also, be aware that the longer you keep your funds in a Stocks & Shares ISA the more likely you are to see higher returns, since while the stock market tends to be volatile over the short term, over ten years or more your money will weather the fluctuations to achieve healthier returns.
With the 2012/2013 ISA allowance giving you up to £11,280 in tax-efficient savings, these types of savings vehicles are a good way to maximise your money.
About the Author: Malcolm Anderson is an independent journalist writing about ISAs.