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.
- Why You Should Take Advantage of Your Own ISA Account
This April (2011) saw the annual ISA allowance increase by £480 from £10,200 to £10,680. Investors and savers now have the opportunity to take advantage of this increase by earning interest for the full tax year if they open up a new ISA account.
For those who don’t know what an ISA is, it is an Individual Savings Account which normally pays out a higher interest rate than a standard savings account and which the saver does not have to pay tax on. The number of people taking out ISAs has risen since they were first introduced because the interest paid on the standard savings account is so poor. This is a result of the Bank of England’s base rate of 0.5%.
So if you have money to save then you might want to take advantage of the numerous deals that are available at the moment. Many of the building societies and banks have decided to continue their special offers which they had introduced at the end of the last tax year so now is a great time to open one of these accounts.
For those hoping to open up a cash ISA, the allowance for the 2011/2012 tax year is £5,340 with another £5,340 available for a stocks and shares ISA. It is important to note that while only half of the annual allowance can be used on a cash ISA, the entire allowance could be used up in a stocks and shares ISA if that was your preference.
There are a number of benefits of opening up an ISA account including:
- As previously mentioned, the interest rates are generally higher than those paid on a standard savings account and there is no tax payable on the interest earned.
- Many ISA accounts offer instant access with unlimited withdrawals so are perfect for those who want to save for something short term.
- If you prefer a long term savings plan, then there are a number of fixed ISA accounts which will pay even higher interest rates. These are perfect if you are saving for something maybe three or five years in the future.
- If the introductory interest rate you received has been reduced, you can simply switch to another ISA account with another provider who is offering a higher rate. You should be able to receive interest from the minute the new provider receives your documentation.
- Stocks and shares ISAs are a great way to save for your retirement as you can invest the full allowance each year and let the experts generate a great return for you.
- 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.