With the end of the tax year looming large on the horizon, it’s time to make good use of your ISA allowance if you haven’t done so already. You’ve only got until midnight on 5th April 2013 to squirrel away up to £11,280 of your hard-earned cash and protect it from the tax man, so there's no time to waste. To help you make the most of your ISA allowance, we've put together our Top 10 tips for the 2013 ISA season.
Tip 1 – Don’t miss any deadlines
Before you do anything else ISA-related, make sure you know all the relevant deadlines. The main deadline to remember is 5th April since this marks the end of the tax year and is the latest date for using your ISA allowance within the current tax year (2012/13). Remember that you cannot backdate your 2012/13 ISA allowance once this deadline has passed - if you don’t use it, you lose it.
Also, look out for other deadlines which may apply. Many ISA providers will need your application - and possibly your cleared funds – before this date. Additionally, some ISA plans have an earlier deadline for ISA transfers while some offer limited funding and may close early if they become oversubscribed.
Tip 2 – Maximise your ISA allowance
Your total ISA allowance for 2012/13 is £11,280. You can put the entire allowance into an Investment ISA (stocks and shares ISA), or you can put up to £5,640 in a Cash ISA. If you decide to use some or all of this Cash ISA allowance, you can also put any remaining balance into an Investment ISA.
Holding money outside an ISA results in any income or growth being subject to tax. Based on current rates of income tax, this takes a headline interest rate of 5% down to 4% for basic rate tax payers and down to 3% for higher rate taxpayers - based on £10,000 over 5 years, this equates to a difference of nearly £600 and £1,200 respectively.
Also remember that these allowances are per person, so a couple can invest up to £22,560 this tax year between them, and when the ISA allowance changes to £11,520 from 6th April as we move into the next tax year (2013/14), this increases to £23,040.
Tip 3 – Understand what your ISA can achieve
In the current climate, and perhaps more than ever before, every penny counts – so why pay tax on money that you can protect from the tax man? If you'd invested the maximum into a Cash ISA since the turn of the millennium and it had grown at 5% per year, you would have a pot of over £67,000 at the start of this current tax year whilst putting the maximum into an Investment ISA that had grown at 7% each year would see a lump sum of over £160,000. These are sizeable amounts, none of which would be subject to income tax or capital gains tax.
Tip 4 – Maintain your ISA at all costs
While your savings and investments remain in their tax-efficient ‘ISA bubble’, the benefits become more and more valuable over time, as the compound effect of not paying tax each year builds and builds. Therefore, not only should you try and maximise your ISA allowance each year, but you should also aim to make your ISA the last money you dip into - once you've taken money out of your ISA it loses these benefits and starts to become subject to tax.
Tip 5 – Don’t be swayed by high introductory ISA rates
Cash ISAs frequently offer savers the headline rate of interest for a fixed period of time – for example, one year. However, this rate is likely to take a steep drop once the honeymoon ‘introductory period’ ends. If you have chosen an ISA with an appealing introductory rate, make a note of the bonus date because after that there's a very good chance that the interest rate you will earn wont be at all competitive.
ISA providers know from experience that most savers will drag their feet when it comes to reviewing their options and switching to a better rate. However good your ISA deal seems at the outset, it’s likely that you’ll need to transfer your ISA fairly frequently in order for it to remain competitive.
Tip 6 – Make sure you review all existing ISAs
It’s not in your ISA provider’s best interests to offer you the best deal year after year as this isn't where they make their money - and don’t rely on them making sure you are aware that your rate has gone down or that a better rate is available, because it won’t happen, even if it is available from the same provider.
Rates change frequently and once you’ve deposited your hard earned cash, your ISA provider knows from experience that you’re unlikely to get round to switching providers even if your rate ceases to be competitive. Don’t be that person! Always check the rate you’re currently receiving and compare it with the wide range of other options on offer.
Tip 7 – Think carefully about timescales
Historically, fixed-rate Cash ISAs tended to offer higher interest rates than instant access Cash ISAs. However, the current environment of low interest rates means that the uplift available in return for locking up your cash is barely worth your while. This means that those with fixed rates or introductory rates coming to an end are likely to be facing a significant drop in the level of interest they receive, even for those who do not require immediate access to their capital.
If you're able to tie up your Cash ISA savings for at least 3 years, but can’t find a fixed-rate deal that’s currently competitive, you should also consider the wide range of structured deposits available. These plans combine capital protection with the potential for higher returns than are generally available from instant access or fixed-rate Cash ISAs.
Investment ISAs should generally be considered as a longer term option, with most requiring a minimum commitment of five years in order to offer competitive returns. In addition to funds, there is a wide variety of both growth and income investment plans, all of which offer a defined return for a defined level of risk.
Tip 8 – Don’t forget to transfer…
You can transfer all Cash and/or Investment ISAs from previous years, or from your current allowance, into a new ISA. This means that you can keep all your savings or investments in one place, reducing the amount of time and effort required to manage your options. You’ve also got the option to transfer money from a Cash ISA into an Investment ISA, and with interest rates causing such a headache for savers, those investments paying a fixed income are being considered more often. Do though bear in mind that once you have transferred Cash ISA money to an Investment ISA, you cannot then transfer these funds back into a Cash ISA.
The ISA transfer process is pretty simple, but not necessarily intuitive. It may seem that the logical way to transfer your ISA would be to take your money out of one account and put it into another. Unfortunately, if you do this you will lose all of the tax benefits. You should never just withdraw the money if you want to transfer – instead, speak to us at Fair Investment and we'll help you through the transfer process.
Tip 9 – Be open-minded…but be an educated customer
The range of options to choose from for both Cash ISAs and Investment ISAs is vast. As the market develops, new opportunities constantly arise for savers and investors alike. What's more, as the end of the tax year approaches, ISA providers will be falling over themselves to persuade you that their ISA offering is the best destination for your hard-earned money.
Although many offers can seem attractive at first glance, it's vital to do your research and with pressure on interest rates set to continue, considering all your ISA options carefully should be a top priority. Fair Investment provides an independent view of the market across both Cash ISAs and Investment ISAs, and the wide range of options available is constantly being updated to reflect our selection of the best the market has to offer.
Tip 10 – Get ahead of the game
The Cash and Investment ISA allowances will increase to £5,740 and £11,520 respectively from 6th April 2013. If you want to go one step better than making sure you beat this tax year’s deadline, why not sort out the following year's ISA allowance as well?
Many Cash and Investment ISA providers make it easy to contribute both this year’s and next year’s ISA allowance. Starting as you mean to go on, and getting organised right at the start of the new tax year, means one less thing to worry about as well as up to an entire year of extra tax-efficient returns.
Review your options
Ready to review the latest Cash ISA and Investment ISA offerings to find an ISA deal that’s right for you? Visit Fair Investment to find out more:
Our latest Cash ISA selections »
Our latest Investment ISA 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.
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