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.
- Junior Cash ISAs
Commencing in November 2011 it is possible for children to have their own cash ISA. It is managed in a different way to the normal cash ISA for adults. Initially this new cash ISA is available for children who were born after 3rd January 2011 – or before 31st August 2002 – provided that they are under eighteen years of age.
There is an exception to these dates which apply to children born between 1st September 2002 and 2nd January 2011 which means that if they didn’t qualify for a Child Trust Fund during that period they are now entitled to open a Child Cash ISA account.
Who can open a Junior cash ISA account?
Different rules do apply so let’s give you a little information. Only a parent or guardian is allowed to open a Child cash ISA account on behalf of the child, and at present the only children who can have a cash ISA is in line with the information above. The total amount which can be saved in a Junior ISA is £3,600 per year – in the tax year up to April 2012. It is possible to split the amount between a Stocks and Shares ISA and a cash ISA as long as the total amount is no more than £3,600 in the current year.
As we are discussing cash ISAs, let’s ignore information regarding Stocks and Shares ISA accounts.
The total amount which can be saved is £3,600, and although this figure is increased every year in line with inflation, as per the normal cash ISAs, the first increase on the Child cash ISA will be in April 2013.
When can funds be withdrawn?
It is possible to move funds between cash ISA providers. Remember that this can’t happen until the end of the financial year, as only one account can be taken out in each year. All monies being saved in junior cash ISA account must remain in an account (although it can be transferred to another company) until the child is eighteen years old. The only exception is if a child has a terminal illness or dies.
Although parents open the junior cash ISA account, it is in the child’s name. The same benefits as for an adult cash ISA apply – so while funds are held in the account, there is no capital gains tax or income tax due on the savings and interest.
What happens when the child attains eighteen years?
As soon as the child becomes eighteen then they are deemed to be an adult and the savings are automatically transferred into an adult cash ISA account. The child then is able to manage their account, without referring to their parents, and they can withdraw both the capital amount and the interest. As with the adult cash ISA once funds have been withdrawn from any year, the monies can’t be replaced.
At age sixteen parents are able to let their children manage their own cash ISA amount – the parents don’t have to do this, but it is an option open to them. The child, however, still can’t withdraw any monies until they reach eighteen.
This new account is due to be available shortly for qualifying children. It will be interesting to follow developments.
- 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.