Starting an ISA is a simple enough procedure. Walk into your bank and set up an ISA, which will siphon the agreed monthly amount from your current account into your new ISA account. That’s it, job done.
Of course, you might prefer to be more involved and chose a product that requires a little more maintenance and a further degree of risk, in order to attain larger financial reward.
What are my options?
The first option is a Cash ISA, similar to a standard bank savings account, only you do not have to pay Capital Gains Tax or UK Income Tax. For the 2012/13 tax year, which ends April 5th 2013, you are only allowed to deposit £5,640 into the Cash ISA, but you can access your cash when you need it.
A nice little nest egg…
A Cash ISA is a great way to put a little bit aside each month. They usually offer good rates of interest compared to banks and building societies and you do not pay tax on the interest. A note of caution: once you have put in the full amount, if you then decide to make a withdrawal, no matter how small, you cannot put it back, as you already reached your investment limit. You will however, continue to accrue interest on whatever remains in the account.
Looking further ahead?
A further option is an investment ISA, a tax efficient method of investing in the stock market, where the investor hopes for a greater return for a higher degree of risk. If you’re looking for longer term savings solutions, say five years or more, a Stocks and Shares ISA is likely to be for you.
Is there a catch?
Yes. The value of your investment may go down as well as up and you are not guaranteed to make a profit. You are also limited to one Cash ISA and one Stocks and Shares ISA at a time, though you are still free to transfer funds between them, up to the government imposed limit of £11,280. If you are unfortunate enough to make a loss on your Stocks and Shares ISA you cannot use that loss to adjust your rate of Capital Gains tax. However, any money you do make when your ISA is performing well is also Capital Gains exempt.
Where do I start?
As a consumer, you have plenty of options concerning where to buy a suitable ISA. You are not merely restricted to your bank’s products - you can choose one from any other ISA manager, including other banks and building societies, National Savings and Investments, unit and investment companies, friendly societies, insurance companies, stockbrokers, fund supermarkets and even some regular supermarkets and retailers.
These providers will be able to give you all the advice and information about the products which are best for you. Of course, they will only be able to advise you about the products they themselves provide.
Thinking of moving?
You can move your money from one ISA to another, so long as you remain within the minimum deposit guidelines. To do this, you simply ask your new ISA manager to arrange for the transfer, to avoid having two comparable ISAs open at the same time. Your existing ISA manager may charge a fee or make you sell off your ISA investment and transfer cash instead. These stipulations should all be contained in the information you received when you originally opened the ISA, so it is prudent to check the fine print before making any decisions that could affect your savings.
Note to self:
• It is a legal requirement that you transfer directly between two managers.
• You must not close down your ISA with one manager and open a new one with another manager.
• When transferring your money, there are restrictions on the products you can put your money into.
• Although you can transfer from a Cash ISA to a Stocks and Shares ISA or another Cash ISA, you can only transfer money from Stocks and Shares ISA to other Stocks and Shares ISA.
• ISAs are not available to children age of 15 or under (they are tax exempt anyway).
• You cannot hold a joint ISA.
• You also need to be resident primarily in the UK, a Crown employee or service personnel deployed overseas.
There are no intrinsic restrictions on withdrawing your money from your ISA any time that suits you and doing so will not affect any tax benefits you have accrued. Some managers may impose a fee if you take your money out before the conclusion of a fixed term, or if you do not give the required notice of your intention to do so.
Consequently, you may lose bonuses or a portion of your interest if you withdraw early. If you do decide to withdraw your money from a Stocks and Shares ISA, you may not get out as much as you put in. If you decide to open an ISA, it is prudent to become well acquainted of the terms and conditions. Attention to detail now may bring great rewards further down the line.
The value of investments can go down as well as up and you may get back less than you invested. The value of tax savings and eligibility to invest in an ISA will depend on individual circumstances and all tax rules may change in the future.