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.
- Savers Failing To Take Advantage of ISA Allowances
It was reported that on the six month anniversary of the increased allowance for cash ISAs that one in three people do not have an ISA account and most of the people who do have one of these accounts is not actually using up their full allowance. In April 2010 the allowance for a cash ISA was increased from £3,600 per year to £5,100 and there is talk that this is to rise again next April by a further £235 (£470 overall between a cash ISA and a stocks and shares ISA). Yet most savers are failing to take advantage of the fact that they are entitled to tax free interest on this amount.
The fact that the Bank of England has kept the base interest rate so low means that savers have not been getting the full benefit from their savings with most savings accounts paying very low interest. However ISA rates are averaging at around 0.7 percent and with no tax to pay on interest earned it is a huge surprise that there are still many people in the UK who are not putting their savings into an ISA account.
There are many banks and building societies that are actually paying interest rates which go much higher than the average ISA rate of 0.7 with Santander actually paying 2.85% to ISA accounts for their current account customers. This rate is offered with their ‘Flexible ISA’ and they will guarantee that the rate of interest for the first twelve months will go no lower than 2.85% but may increase in line with rate hikes from the Bank of England. However after the initial twelve month period, the rate will revert to the variable rate which is currently 0.5%.
Savers then have the opportunity to transfer their cash to a new ISA account paying higher interest. There really is no reason why those with money to save are not taking advantage of an ISA account. And with expectations of an increase in the allowance next April, savers really could benefit from having a cash ISA.
There were fears that the government were set to drop the allowance or scrap it altogether in line with their strict stance on spending cuts but the Treasury is expected to make an announcement in a couple of weeks that the allowance is to rise.
Hopefully more people will begin to take advantage of this fantastic scheme and will start to transfer their savings into an ISA account as soon as possible.
- 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.