10 things you didn't know about ISAs

Golden coins on black background. Macro shot.

ISAs can be very simple. Cash ISAs are like savings accounts, and stocks and shares ISAs are like investing in stocks and shares. The only difference is that they are tax efficient. For many people, that's all they need to know. However, if you want to take full advantage of all that ISAs have to offer, it's worth delving a little deeper.

We reveal 10 really useful things you may not know about ISAs.%VIRTUAL-SkimlinksPromo%

1. The tax advantages

For cash ISAs, there's simply no income tax on interest. Normally you would be taxed at your highest rate, but with an ISA there's no tax to pay.

For stocks and shares ISAs there's no capital gains tax on profits. If you invest in shares outside an ISA, you can only make up to an annual limit (£10,900 this year) before you have to pay this tax - at 18% for basic rate taxpayers and 28% for higher-rate taxpayers. By contrast, inside an ISA it doesn't matter how much your investments increase in value - you don't have to pay any tax on the gains.

There's also no tax on the interest earned on bonds, and there's a 10% tax on dividends. This doesn't offer any real benefit to basic-rate taxpayers, who pay 10% on dividends outside an ISA anyway. However, it's a bonus for higher-rate taxpayers - who would otherwise pay 32.5%.

2. There are limits

You get an annual allowance every year which you can invest in an ISA. This year the limit is £11,520, and if you want, you can invest the lot in a stocks and shares ISA.

Alternatively you can put up to £5,760 of it in a cash ISA. You can choose just to save into a cash ISA - and you can save as little as £1 in some accounts.

However, if you want to invest in a cash ISA alongside a stocks and shares ISA, whatever you have in cash will come out of your overall allowance. So, for example, if you chose to put £2,000 in a cash ISA you'd have £9,520 of your allowance left for stocks and shares, whereas if you put £3,000 into cash you'd have £8,520 left for stocks and shares.

3. If you withdraw cash you lose that chunk of your allowance

It means that cash ISAs aren't useful for the kinds of emergency funds that you find yourself dipping into regularly - because after you dip in, you won't be able to top it back up again.

It's also worth highlighting that if you don't invest or save anything at all in a tax year, you lose the allowance for the year - it isn't carried over.

4. You don't have to leave your cash in a poorly-performing ISA - you can transfer

The fact that you cannot dip into an ISA means you cannot take your money out of a poor ISA and then open up a new one - because once you cash in your ISA you lose your allowance.

However, it doesn't mean you have to leave your money stuck in a low interest account or a poorly-performing fund. You need to speak to the provider of the product you want to switch to, and arrange a direct transfer.

5. Your kids have an ISA allowance

Children under the age of 18 can get a Junior ISA. At the moment they are only available to those who did not qualify for a child trust fund. They are split into cash and stocks and shares accounts - just like the adult ones. However, the differences are that the limit is only £3,720 a year, and they can only access the money when they reach the age of 18.

It's worth bearing in mind that most kids don't pay tax anyway, so this may not offer any significant advantages. However, it's useful if the bulk of the money comes from their parents - because outside an ISA, if they make more than £200 interest a year it is taxed as the parents' money. Inside an ISA there's no tax to pay.

6. You will eventually be able to transfer from a child trust fund to a Junior ISA

The government has finally said it will allow children with money in a child trust fund to transfer into a Junior ISA from April 2015. This will dramatically increase their investment options.

7. They are a great way to save for retirement - alongside a pension

Much of the debate over retirement income centres around questions such as 'do I invest in my property or a pension?' or 'should I get an ISA or a pension?' However, the experts agree that the best retirement savings come from a variety of sources - including pensions, ISAs and property.

This has a couple of advantages. First, it means you can use the investments that are best suited to your needs at specific times. So, for example, if you want to put off buying part of your annuity you can live off ISA savings in the interim. In addition, it means you can take advantage of all the available tax allowances for your savings.

8. The sooner you invest in the tax year, the better

Many people are focused on the end of the tax year, and getting their ISA application in by the 5 April deadline. However, we should be more focused on the beginning of the tax year - because being fixated on deadlines means we're missing out on 12 months of potential investment.

Recent research looked at two investors. One put the full allowance into a fund at the end of the tax year, and the other put exactly the same amount of money into the same fund at the beginning of the tax year. They both did it every year from 2000, and by the end the investor who had taken advantage earlier was almost £4,000 better-off.

9. You don't have to be an investment genius to have a stocks and shares ISA

The words 'stocks and shares' can be off-putting for some people. There are certainly plenty of investment experts who have their money in the kind of account which lets them buy and sell individual shares and capitalise on their expert knowledge.

But there are plenty more who know very little about investments. With some research they can find the right fund for their money (one which matches their aims and attitude to risk), and then leave the expert fund manager of the fund to worry about the companies they invest in.

10. Platforms are cheaper than going direct

In many walks of life, cutting out the middle man is a great way to save money. However, when you are investing in funds you can save money by using an investment platform - which are operated by brokers. They will negotiate a big discount on funds, so that when you buy into the fund you have to pay a smaller fee than you would by going direct.

10 things your bank doesn't want you to know
See Gallery
10 things you didn't know about ISAs
Once you have opened a current account with a bank or other lender, you will get a steady flow of emails, letters (and maybe phone calls) offering you a savings account, loan, mortgage, ISA etc to go with it. But while it may be tempting to have everything in one place, it's better to do the legwork and shop around for the best financial products. You can compare interest rates on loans and savings accounts in the 'best buy' tables in the newspapers, or look online on comparison sites. Remember you can still easily transfer your money between accounts, even if they are not with the same financial institution. 
Whether you want to apply for a new mortgage or refinance an existing one, your bank will probably be very happy to give you an instant quote in the hope that you will go with them. They may not tell you that you can shop around at other lenders. A mortgage broker can give you an overview of the best interest rates on offer, and might be able to cut you an even better deal him/herself. 

Want to cash in your jars of change that are sitting on your shelves at home? Many banks are not very keen on coins. They often only take it from their own customers. You will have to sort it into different denominations and put the coins in the bank's bags in set amounts (for example, £1 for coppers, £5 for silver, etc). Some banks only take a limited number of bags a day, or won't take any at busy times. Others take a different view: HSBC has free coin deposit machines in many larger branches where you pour your jar of coins into the machine and it counts them and automatically credits your account. Barclays, NatWest and RBS also have machines in large branches in city centres.

Bank employees now have a duty to point out that they only advise on the bank's products and don't offer independent financial advice. What they won't tell you is that even the advice they give you about the bank's own products should be treated cautiously. Bank staff are often undertrained, underpaid and overworked. (You could ask for the employee's qualifications before getting advice.) So do your own research and/or find an independent financial adviser.

Nothing is set in stone. Your bank won't tell you this, but sometimes it will waive a fee, for example an overdraft or an ATM fee, depending on the circumstances. You have nothing to lose by asking, if you can argue persuasively why they should waive the fee. Citizens Advice says your bank should treat you sympathetically if you can show financial hardship.

As stated in the previous slide, some things are negotiable – such as interest rates or waiving fees – if you can make a good case for it. In that instance, talking to an employee in person is better than filling in a form online.

If your account is overdrawn and you get paid, your bank could use this money to pay off your overdraft without your permission. However, you have a right to ask them not to do this so you can pay your rent or mortgage first. This is called first right of appropriation. You have to ask your bank in writing, and you'll need to write to them with new instructions every time money gets paid into your account. Make sure you write 'first right of appropriation' in your letter.

If money is mistakenly credited to your account, your bank or building society can recover the money, assuming they do this within a reasonable time. But you may be allowed to keep the money, for example if you didn't realise the bank had made a mistake and spent the money in good faith. You would have to prove that you spent it in such a way that it would be unfair to ask you to pay it back. You can complain to the Financial Ombudsman if you think your lender is being unfair in asking you to repay the money.

If you do have to pay it back, you could try to reach an agreement with your bank to pay it back in instalments without interest being added.

The Financial Ombudsman Service has more advice on what happens when payments have been credited to the wrong account. If you did something wrong - for example, by entering the wrong account number - rather than the bank, the Financial Ombudsman may still uphold your complaint. They consider whether the financial institution made it clear to the consumer that only the bank sort code and account number are used to process the payment, rather than the name of the payee. They will also ask whether the lender should have realised that the consumer had made mistake, and once the problem came to light, did the firm take reasonable steps to try to get the money back from the recipient.

If too much is deducted from your account, your lender may have to refund the full amount of the payment. For example, if the money is taken through a direct debit or credit card payment for a hotel room or car rental. When deciding whether the debit was reasonable, the bank or building society will take into account your previous spending pattern. But the bank doesn't have to refund the payment if you agreed the amount beforehand or were informed of the payment by your lender at least four weeks before.

If you don't have enough money in your account to cover a direct debit payment, your bank may not make the payment. It doesn't have to tell you that the payment hasn't been made, so the onus is on you to keep checking your account. If, on the other hand, the payment goes through, you may be charged for an unauthorised overdraft.

Read Full Story