10 things you didn't know about ISAs
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 advantagesFor 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 limitsYou 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 allowanceIt 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 transferThe 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 allowanceChildren 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 ISAThe 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 pensionMuch 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 betterMany 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 ISAThe 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 directIn 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.
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