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.
- Transferring Cash ISA Funds
People who kept their savings in an account prior to the current Cash ISA system, will have had a Toisa account. This was another tax free savings account, but when it ceased to exist in 2008 all monies kept in Toisa accounts were transferred to a simple cash ISA account.
Although transferring all funds into a cash ISA account is fine, many people have just left their savings in the account which was set up for them. No extra funds can be added to these accounts, and in a huge number of cases, the savings have simply been left to gather interest. Unfortunately, owing to the existing financial difficulties in the country and globally, over the past few years, interest rates have been especially low, meaning that for the past three or so years there will have been very little interest paid to these accounts.
Once monies are transferred into a bank savings account, the bank doesn’t have a duty of care to ensure that they give you a high rate of interest. What happens is that once it is in a bank account, it remains there and it is up to the saver to make sure that they transfer the monies into another account with a higher rate of interest. The bank can reduce its interest rate to a minimum amount and it is up to the saver to look for accounts with better rates of interest.
A bank doesn’t have to allow a transfer into their account from savers with Cash ISA funds – it is up to each individual bank. Many accounts though will allow transferred funds. Most savers will have variable interest rates, but it is essential that the account is checked every six months to confirm that the interest rate is still competitive.
There is an alternative way to establish an interest rate which is set for a specific length of time and that is by choosing a Fixed Rate account. Funds can be locked away for a period of one to five years during which time you receive a confirmed rate of interest, but don’t have access to all the monies. These accounts do have to give access by way of a withdrawal with sixty days’ notice – however, there will be a penalty for the saver of between 60 and 180 days interest.
This is a balancing act though because there are some reasonable interest rates available. The banks know that they have the funds for a specific length of time so they can plan their lending and borrowing strategies more easily. It is possible to find a one year fixed rate at 3.35 per cent interest. Savers who are prepared to lock their money away for two years can receive a four per cent interest rate.
Those savers who are happy to tie up their funds for five years can earn 4.4 per cent interest; however a word of caution, should the country start to recover financially, tying up funds for this length of time may not be the best idea.
As stated earlier it really is a matter of personal choice.
- 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.