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ISAs
ISAs
ISAs - Investing For The Future |
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Individual Savings Accounts (ISAs) were introduced in April 1999 as a replacement for Tessas and
Peps. These are a tax efficient plan where a number of types of investment can be held with any
gains or interest being from tax. Introduced as an incentive to get people saving for the long term, they have been successful but not everyone has taken up their annual allowance. To improve the take up, the government have continually simplified the rules surrounding them and increased the limit that can be invested. Currently, this is £7,200 per annum but being increased to £10,200 for the tax year 20010/11 for everyone (over 50s benefit from this new limit immediately!). Hence, if someone had taken advantage of their annual allowance since 1999, they would have sheltered £72,100 from tax. However, the actual value would depend on what the funds were invested in. Since the full amount can only be invested in stocks and shares, the current value would depend on the value of the underlying assets – if just the 50% cash allowance each year was used, then £36,050 would have been sheltered with accumulated gross interest. One of the benefits of an ISA is that there are a number of non cash assets that can be held. These include shares, stocks, unit trusts, investment trusts, bonds and exchange traded funds. Cash can be deposited in a normal interest bearing account. Once established, the funds within an annual ISA wrapper can be reinvested into other asset types. Once withdrawn, they cannot be replaced. The longer the fund is left, the more the gains will accumulate tax free. Therefore, for a high rate tax payer, they can invest annually, not suffer the high rate deduction on interest or dividends and withdraw funds when they are a standard rate or nil band tax payer in retirement. No capital gains will be payable or tax on the interest accrued. With a large number of provider's available, competition for ISA funds is fierce and rates competitive. Therefore, shopping around for a cash ISA is important. If you are looking to invest the maximum amount, then you have to look at shares or investment trusts of one kind or another. Therefore, look for a provider that offers access to a wide range of funds – both geographically and by industry sector – to make sure that you have the opportunity to switch at a later date into more attractive returning options. And that is the key. Although the funds are available to withdraw at any time, their real value is in the long term capital and interest growth opportunity. Therefore, looking to be a little more adventurous in the shares or funds portion of the fund gives an opportunity to take advantage of the historic outperformance of stocks over cash. Another advantage of ISAs is that they are transferrable between managers. Therefore, if rates offered by another manager are more attractive in the future and provided they accept transfers, you can benefit from their offering. Most will accept transfers free of charge or provided you open or hold an account with them. By now, it is possible to have a portfolio of 9 ISAs, so getting them all into one manager can greatly reduce the personal administration involved in looking after your investments. Anyone over the age of 18 can invest in an ISA so a husband and wife have the opportunity to shelter £14,200 this year from tax. Child Trust Funds can also be rolled over into ISAs to maintain a tax free status for any savings that you have made under that scheme for your child. So ISAs can form a very useful part of a long term savings strategy. Whilst not affording the opportunity for the mega tax free returns that may be achieved with, say, forex or spread betting, they are a safe and unspectacular home for savings. This does not mean that you cannot lose money – any investment in shares can go down as well as up – but these are designed for the long term so choosing carefully and being patient should bring better returns than a taxed investment in similar assets. |