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.
- Cash ISA - Ensure That You Save the Full Amount in this Tax Year
Now that we’ve survived Christmas and the New Year, we’re in 2012 and only three months away from the start of a new financial year. For those people who gradually save and add funds into their cash ISA, it’s now a good time to check how much extra you need to reach this years’ maximum limit of £5,340.
The amount which can be saved in a cash ISA for the tax year 2012-2013 will be increased in line with inflation. It really is important not to rush into opening an account before checking out the rates of interest offered by the bank. Remember it is your money, and you want to ensure that you earn as much tax-free interest as possible. Another question which the saver should ask is “how long will the interest rate remain at the current figure” and the options of a variable or fixed rate of interest.
Withdrawals of Monies already Saved in the Current Financial Year
Anyone withdrawing any part of their savings during the financial year must remember that they can’t return that amount to the cash ISA account. Let’s clarify the situation as follows: if the investor had already put £4,500 into their cash ISA account in this financial year then they only have a further £840 which can be added to the account.
However, funds are suddenly required for an urgent repair needed to the home. The cost of the work will be £3,000 and there isn’t any alternative way to pay for the repairs other than withdrawing the funds from the cash ISA account. The money is withdrawn, the repairs are made, and then the investor has a small windfall of £2,500 which the investor would like to return to his cash ISA account.
Unfortunately, this money can’t be paid into the current years account. The maximum amount which can be paid into the savings account is £840, which is the amount which was still available between the highest amount which had previously been saved, and the total amount which can be saved during the year.
Once the money has been withdrawn from the savings accounts it is lost for that financial year.
How Long should the Funds be Left in one Account?
The other consideration needs to be “how long the investor wants to tie their money into that financial institution”. There are some reasonable rates of interest, but tying the money in for two to five years at one institution, may not be the most sensible way ahead.
It really depends on the highest rate of interest which is fixed when the account is opened. Anyone who is unsure about whether they may need the funds may be best served by going for an “instant access” account, which means that it is always available.
Next time we’ll discuss the various options for fixed rate interest.
- 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.
- 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.
- 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.