With 2012 steaming ahead, this is good reminder of just how quickly time flies and how easy it is to put off until tomorrow that which can be done today - and the ISA season is a perfect example of when many of us are guilty of leaving things till the last minute.
The period between now and the end of the current tax year is an important time for both savers and investors, which is why we have put together out Top 10 Tips for this ISA season.
Tip 1 – Remember the deadline
The phrase ‘use it or lose it’ should be at the forefront of your mind. The deadline for making your investment is 5th April 2011 and you will need to check with the ISA plan provider when they will need your application and possibly cleared funds.
You cannot backdate your ISA allowance and so once the deadline has gone, that is it. The only thing worse than making an ISA investment at the end of the tax year is forgetting to do it altogether, so if you want to protect your interest and growth from the tax man, take action now.
Tip 2 – Maximise your allowances
The maximum you can put into a Cash ISA for the current tax year is £5,340 and the maximum you can put into an Investment ISA is £10,680. Remember, even if you put the maximum into a Cash ISA, you can still put up to £5,340 into an Investment ISA. These allowances increase to £5,640 and £11,280 respectively from 6th April 2012.
Holding money outside of an ISA results in any income or growth being subject to tax. With basic rate income tax at 20%, this takes a headline interest rate of 5% down to 4% and based on £10,000 over 5 years, this equates to a difference of nearly £600. For a higher rate taxpayer the situation is even worse, taking your 5% down to 3% which equates to a difference of nearly £1,200.
Also remember that these allowances are per person, so a couple can invest up to £21,360 this tax year, and a further £22,560 from 6th April 2012 onwards.
Tip 3 – Understand the potential
It is always easier to ignore those things when we don’t understand the real benefit and this sometimes happens with the valuable ISA allowance. To help illustrate this, if you had invested the maximum into a Cash ISA since the turn of the millennium and it had grown at 5% per annum, you would have a pot of almost £60,000 at the start of this current tax year. If you had put the maximum into an Investment ISA and this had grown at 7%, this figure would be almost £140,000.
Certainly these are significant amounts, especially when all of this will have grown tax-free (no tax payable on either income or any capital gains). In the current economic climate where every penny matters, it's never been more important to minimise the amount of money you're paying to the tax man and an ISA offers a simple and straightforward way of saving and investing, whether that's for you or for your children.
Tip 4 – Check your current interest rate
Don’t think that your current provider will offer you the best deal year after year as this is rarely the case, and don’t rely on them telling you that a better rate is available, even directly from them, because this won’t happen. Always check the rate that you get on your current ISA, which should be detailed on each statement they send you. Rates change frequently and many providers rely on you not taking action and therefore staying on a lower rate than would be available elsewhere in the market.
Tip 5 – Review those introductory rates
You should also be on the lookout for any introductory rates that may have come to an end – that headline rate may have been a good deal and looked appealing at the time but it is important to check that the standard rate you receive is also competitive. Too many of us forget to take action and the chances are that you will need to transfer to remain competitive.
Tip 6 – Consider carefully how long you want to tie your money up
Typically, with Cash ISAs the longer that you can afford to put your money aside for, the better the interest rate you’ll get. If you don't need to have access to your money straight away, you could consider fixed rate cash ISAs which commonly offer better interest rates than instant access cash ISAs, in return for committing your money for a set period.
If you are looking to tie up your Cash ISA savings for at least 3 years then you can also consider the wide range of structured deposits, which can combine capital protection with the potential for higher returns than are available from fixed rate cash ISAs.
Investment ISAs should be considered as a minimum commitment of 5 years. You have a wide choice of both growth and income investment plans which can offer a defined return for a defined level of risk. We also have our Fund Supermarket where you can access up to 1,500 funds from more than 90 investment managers, covering all of the different asset classes.
Tip 7 – Maintain your ISA savings and investments at all costs
The tax free benefits of an ISA are valuable and become more valuable over time. Therefore you should try and make your ISA the last savings or investment that you dip into, as once you’ve taken money out you might not be able to pay it back in and therefore you’ll reduce the amount of benefit you get.
Tip 8 – Don’t forget the transfer
You can transfer all previous ISA holdings, whether they are in a Cash ISA or an Investment ISA. This means that you can keep all of your savings and/or your investments in one place, reducing the amount of time you need to spend reviewing your options. You can also transfer any money held in a Cash ISA into an Investment ISA, but you should note that you cannot then transfer the funds back into a Cash ISA.
Transferring is simple, be it a Cash ISA or Investment ISA, and at Fair Investment we are here to help, building on our many years of experience ensuring that transfers are carried out quickly and smoothly. Most importantly, remember that if you are thinking of transfering, you should never just withdraw the money from your ISA – or you will lose all of your tax free benefits.
Tip 9 – Always be prepared
Even better than making sure you beat the tax year deadline, is to sort out the following year’s ISA allowance now, and here’s why. If you invest £10,000 and receive 5% growth but you only invest right at the end of the tax year, the effect of the beneficial tax treatment is minimal. However, if you had invested at the start of the tax year, the removal of the 20% tax on your interest would have added another £100 – for doing nothing other than being well organised.
The Fair Investment Fund Supermarket can also help with your Investment ISAs. Not only is this an attractive solution for consolidating your existing ISAs, but you can also apply for the new tax year ISA allowance now. Combined with the facility to hold your investment in cash whilst you decide how to invest, there is no excuse for waiting...
Tip 10 – Review ALL of the options available
The range of options to choose from, spanning both Cash ISAs and Investment ISAs, is vast and growing day by day in this run up to the end of the tax year. As the market develops, new opportunities arise and with pressure on interest rates and the diminished range of fixed rate offerings, these should be considered carefully.
This time of year brings a high level of competition from providers looking to persuade you theirs is the best option for your hard-earned money. Fair Investment provides an in-depth review of these offerings across both Cash ISAs and Investment ISAs and our wide range of options is constantly being updated to reflect a selection of the best available in the market.
For our current ISA highlights, visit www.fairinvestment.co.uk or see our article ‘Our ISA season selection’
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Tax treatment depends on your individual circumstances and may change.
Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated, in which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.
© Fair Investment Company Limited