- By Malcolm Anderson
- Published 12/30/2011
When it comes to saving money, people are always on the lookout for the latest and greatest ways in which to do so. What often goes unnoticed, however, is that one of the most effective ways of saving the pennies and pounds has been around and available for a good number of years. Whether it’s a fear of hidden catches, the dazzling myriad of account options or the turn-off factor of the jargon that accompanies financial talk, Individual Savings Accounts (ISAs) do not seem to have the monopoly that their benefits and perks suggest they ought to. Opening an ISA account is both a simple and effective way of protecting your savings from the looming spectre of the taxman.
ISA accounts were introduced by the government in 1999, offering tax-efficient incentives in an effort to encourage people to save. Money surrounded by the efficient ISA wrapper is treated differently to other savings and investments when it comes to taxation.
Quite simply, whether your savings take the form of cash or shares, taking advantage of your ISA allowance is a very effective method of safeguarding your savings. In terms of cash, your savings are securely invested in a bank or building society deposit account. These accounts tend to have a higher rate of interest than regular accounts. Thus, those who save in this way are rewarded with their initial investment sum plus the interest earned on this original amount.
From a tax perspective, standard instant access savings accounts are less efficient than ISAs. For basic rate taxpayers, 20 per cent of the interest earned on the account is due to the government in the form of tax. Higher rate taxpayers are hit with a 40 per cent rate, while for additional rate taxpayers a substantial 50 per cent of their interest earnings are sliced.
Returning to ISAs, and stocks and shares ISAs specifically, the circumstances for investment are a little riskier and are potentially more likely to fluctuate than for Cash ISAs. The increased element of risk arises from the fact that, ultimately, there is no guarantee the return rewarded will exceed the original starting investment. Simply put, the value of investments can go down as well as up and you may get back less than you invested.
A common use for ISAs in terms of shares allowance is the use of a collective investment in vehicles such as unit or investment trusts. These investments are pooled as a fund manager selects a range of shares based on certain sector or geographic criteria, while the investment value depends on the performance of the collective shares.
There are two significant tax efficiencies to investing in this manner. Firstly, any profits made from such a venture are not subject to capital gains tax, allowing you earn money on all of your investment. In addition, it enables all the tax placed on bonds to be reclaimed.
Self-Invested Personal Pensions (SIPP) are another potential savings haven for UK investors. This is a government-approved personal pension scheme that grants individuals permission to take their own investment decisions from a varied list, given approval from HM Revenue & Customs. Stocks and shares listed on a recognised exchange, validated carbon credits and commercial property are among those investments not subject to a tax charge. Remember the eligibility to invest in an ISA or SIPP will depend on your individual circumstances, and all tax rules may change in the future
With all the concern and controversy that surrounds the issues of finance today, getting your savings and investments into a protected ISA wrapped account makes both sound and prudent financial sense.
About the Author: Malcolm Anderson: independent journalist writing about SIPP investment options.