Individual Savings Accounts (ISA’s)

If you want to save back money, then one way to do this is to use an Individual Savings Account (ISA). There is so much information available for ISA’s that it can be difficult to go through and understand completely, the first thing that you will need to realize is that an ISA is a specialized type of savings account. The reason that it is different from other types of savings programs is that you do not have to pay tax on the income that is generated through the ISA. This is a program that was established in 1999 and it allows you to move money around easily.

Because of the way that the ISA is set up you can choose to make a long term investment for your retirement purposes, or a short term investment that will allow you to save money for a project or purchase you are considering. The way that you can do this is by choosing from either a Cash ISA or a Stocks and Shares ISA. In the duration of a tax year you can choose which type of account you want to make deposits into one of each of these types of accounts. So, you could have both a Cash ISA and a Stocks and Shares ISA if you need to different accounts for your needs.

If you are looking into a short term investment, then a Cash ISA would probably be your first choice. This is because it is much easier to move your money around in these types of accounts, so you can make deposits and withdraws as you need. On the other hand, you may find that you also want to have a longer term investment that would allow you to save up money for a home purchase or retirement then you would most likely want to put your money into a Stocks and Shares ISA. However, you should know that because of the fluctuations in the market that it might be possible for your investment to decrease. Also, while it is possible for you to move money from a Cash ISA into a Stocks and Shares ISA without losing your tax free status, it is not possible for the opposite to be done as money cannot be moved from a Stocks and Shares ISA to a Cash ISA.

If you are considering an ISA and are looking at different ISA managers then you will want to make sure that you are getting the best rates. This is because a certain ISA may pay out at a special introductory rate, but after this period expires you will most likely want to make sure that you look for another ISA manager so that you can find the best rate on the market at that time. There is often a lot of competition for Cash ISA rates, so you should be able to find a good one that will work for you, just be sure to transfer the money. This way you do not risk losing the tax-free status of the money in the ISA by withdrawing it.

  • Are The ConDems Going To Hit the ISA?

  • With the government getting ready for a wave of spending cuts across the country it is understandable that savers have concerns about how long the ISA (Individual Savings Account) is going to last.  Two incentives which were introduced by the previous government have already been targeted.  The Savings Gateway and the Child Trust Funds have been done away with and ISAs could be next on the hit list.

    Tax relief on ISAs cost the government £2.2 billion in 2008/2009 and a further £1.6 billion in 2009/2010 so it really would not be a huge surprise if this is one way that the current government try to recoup some of the nation’s deficit.

    This will be a huge blow to savers who are already finding it difficult to get a decent return with interest rates being so low.  And if the ISA is on the way out then there really won’t be much incentive for people to save their hard earned cash.  At the moment it is one of the only bright lights for those wanting to save.

    Currently there are plans in place for the ISA limits to be index linked as from April 2011 but if the ConDems are intent on slashing spending costs then this plan could be abolished and we could also see a cut back on allowances.  Or they could even put an end to the tax free interest completely, although the more likely scenario is that they will limit allowances. 

    So for anyone with money in a savings account at the moment, the advice would be to open up an ISA now while they are still available.  The fact that any interest earned on up to £5,100 per year in a cash ISA is tax free should mean that it is more attractive to those wanting to save than a normal savings account.  Savers can also take advantage of the fact that they can put a further £5,100 into a stocks and shares ISA each year and they won’t have to pay tax on the interest earned from this either.

    So if someone in the 20% tax bracket were to earn £150 interest on their savings in a normal savings account, they would only receive £120 because £30 would have to be paid in tax.  But if that same person had opened up an ISA account and had earned £150 in interest, they would take the entire £150 as the interest earned on these accounts is tax free.

    However, it would seem that time is running out for those wanting to make the most of their savings and the advice would be to open up an ISA while you still can.

  • What is a Cash ISA?
  • A cash ISA is, basically, an Individual Savings Account that is based on cash instead of investments. The main benefit of a cash ISA over an investment-based ISA is that the money is tax-free or may be eligible to earn tax benefits. In a way, a cash ISA is very similar to a savings account. The other benefit is that a cash ISA is not as risky as other ISA’s because you are saving the money, not investing it in the market. This means your savings will always be accessible and secure.
  • How do cash ISAs work?
  • A cash ISA works very similarly to a savings account. You make a deposit into the cash ISA, and it begins to earn interest - generally, this interest is paid annually, although some cash ISA’s may pay quarterly or even monthly. A cash ISA is different from a savings account in that it is tax-free, meaning you make more money than you would with a standard savings account. It is also different from other ISA’s in that it is based on cash instead of investments, so there is no worry about losing money on the stock market.
  • What to watch out for
  • While a cash ISA may look secure, reliable, and attractive with its lack of risk and tax-free status, there are a few things you should take into consideration. First, note that some ISA’s have an introductory bonus, meaning they will pay better the first twelve months. This means you may want to move your cash ISA to another institution after that. If you do, you’ll want to transfer the balance, not withdraw it. If you withdraw it, the funds may be taxed. Remember, too, that you can move money from your cash ISA to a stocks and shares account, but you can’t move it from stocks and shares to a cash ISA.