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.

  • How Much Can I Save in a Cash ISA?

  • An Individual Savings Account which is normally referred to as a Cash ISA, is basically a savings account into which all UK adults, over 16 years of age, can place up to £5,340 during every financial year which is from 6th April to the following 5th April.  Whilst the amount in the ISA remains in that account all the interest paid on the savings is Tax Free for as many years as the money remains there.

    It is a little more complicated as one person can’t ever put more than the allowed amount of £5,340 into the account during the tax year, even if you withdraw some of the funds.  You can’t ever replace the money.  Let’s clarify this as follows – this year you put £2,500 into a cash ISA; however the car needs expensive repairs which will cost £1,500 which you need to pay from your cash ISA account.  This will leave a balance of £1000 in the savings account.  Later on in the same financial year you have a windfall and decide to pay the funds into your account.  Knowing that you are allowed £5,340 in the account during the year, it may reasonably be thought that you can pay £4,340 to bring the total up to this amount.

    Unfortunately, this is incorrect, because at one point there was £2,500 in the account.  Even though £1,500 was withdrawn, this is disregarded, and only an additional £2,840 can be placed in the account which is the difference between £2,500 and £5,340.

    Although the amount of £5,340 can be paid into a cash ISA account each and every year, once that financial year has ended, money can’t be added retrospectively.  If you are opening a cash ISA in the current tax year of 2011-2012 you will be able to open a new ISA account every year from now on as you automatically receive a new ISA allowance every tax year.   If you don’t save the full amount during any year, then that’s it – unfortunately no further funds can be added.  Tax Free interest, of course, will continue to be paid for every year that there are funds in the account.
    Each financial year a new cash ISA can be opened in a different account; however only one account can be used each year.  In other words, it isn’t possible to take the allowance for this year which is £5340 and split it over several accounts, but a fresh account can be opened every tax year.

    The interest rates being paid on cash ISAs varies tremendously so it is important to take care in choosing where to save your money.  One interesting point to remember is that if you have cash ISAs from previous years and the funds are sitting in an account which isn’t paying a good interest rate, it is perfectly possible to transfer the funds to another account which is paying greater interest.  We’ll discuss details about where to transfer previous cash ISA funds in the next article, together with suggestions regarding the best accounts for the current year.

  • 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.