Christmas is fast approaching and another year is about to pass us by and before we know it, we will have reached the end of the financial tax year. So we thought now might be a good reminder about using your Individual Savings Account (ISA) allowances.
Indeed, you might want to encourage your children to consider putting some of their “Christmas money” into an ISA rather than buying the latest “apple gadget”. Well one can try.
Tax efficient savings vehicles such as the ISA have been around for more than 15 years but we still receive many questions from clients about them. To help you understand ISAs better in the run up to end of the financial year, we’ve answered the top ten questions we’re most commonly asked.
1. Exactly what is an ISA?
An ISA is a ‘wrapper’ that’s designed to go round an investment, making it more tax efficient. There are three types of ISA; cash, stocks and shares and innovative finance (IF ISA).
Cash is like a normal deposit account, except that you pay no tax on the interest you earn.
A stocks and shares ISA allows you to invest in equities, bonds or commercial property without paying personal tax on your returns.
An Innovative Finance ISA allows you to invest your money (or lend it) via Peer to Peer lending. This is an alternative source of lending for small business where a traditional bank may not lend some or all the capital and maybe not at a rate they want to pay. Your return normally comes via being paid an agreed level of monthly interest over the period of the lending with the capital being repaid at the end of the term.
Remember you can also now transfer cash ISAs into stocks & shares ISAs and vice versa.
2. How much can I contribute?
For the tax year ending 5th April 2017, the maximum level is £15,240 per individual (so a husband and wife could contribute £30,480).
3. What are the crucial dates?
The ISA limits apply to a tax year – so the current allowance of £15,240 applies to the tax year running from 6th April 2016 to 5th April 2017. The next tax year starts on 6th April 2017 and the overall ISA limit will rise to £20,000.
It’s important to note that any unused allowance doesn’t roll over – so if you don’t use it, you lose it forever.
4. Can children have an ISA?
Yes, they can as long as they don’t have an old style Children’s Trust Fund; the main difference between a Junior ISA and a normal ISA is that their allowance is £4,080 per annum.
From 6th April 2015 old Child Trust Funds can be transferred to Junior ISA accounts.
5. Are the returns guaranteed?
Some ISA providers guarantee their interest rates on cash ISAs but the return on a stocks and shares ISA cannot be guaranteed, and you could get back less than you invested. As with all forms of investment it makes sense to take advice from an independent financial adviser, and stocks and shares ISAs should be seen as a medium to long term investment.
6. I’ve heard people say ISAs are better than pensions: is that right?
No, not necessarily. ISAs and pensions are entirely separate and both can, and do, play a part in our clients’ financial planning. Some clients prefer the simplicity of ISAs, but they don’t attract tax relief on your contributions like pensions do. The best idea is to talk to us about your long term financial goals and we’ll discuss the advantages and disadvantages of both ISAs and pensions, and help you decide on what’s best for you.
7. My ISA was with XYZ Building Society last year. Do I have to stay with them this year?
No, absolutely not. You can have a different ISA provider every year if you so choose. For cash ISAs it obviously makes sense to choose the provider who’ll give you the best rate of return, and for a stocks & shares ISA you’ll naturally want to consider accessing investment solutions that meet your risk profile at a competitive cost.
8. I have ISAs with several different providers. Can I consolidate them?
Yes, you can – and you won’t lose the tax ‘wrapper.’ Many previously attractive savings accounts cease to have a good rate of interest, and naturally some stocks and shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.
9. Can I save regularly in an ISA? I prefer saving on a monthly basis.
‘Yes’ is the simple answer to that question. We’ll happily advise on which providers accept monthly savings.
10. Someone mentioned ‘re-registering’ an ISA. What does that mean?
Many of our clients are now choosing to keep track of their investments via what’s known as a ‘wrap.’ Essentially this means that investments with different companies and/or investment groups are brought together under an overall ‘wrap’ for ease of administration. If an ISA is included in this type of arrangement it will need re-registering to the wrap provider. The underlying investment doesn’t change, although it can if it is right to do so.
So there it is, your top ten questions answered. If you’d like any further details, advice on your current or planned ISA investments or you have any other questions, then as always, don’t hesitate to contact us.