Tuesday, 17 April 2012

In the money: ISAs

Jasmine Birtles explains the tax-free savings account

Written by Jasmine Birtle
Should you put money into an ISA?

I certainly think so. The point of ISA investment is that you don't pay tax on the gains you make with them. The question is, what type of ISA should you invest in and what happens to your money once it's there?

What is an ISA?

ISA stands for Individual Savings Account. It simply allows you to save a certain amount of money each year either in a savings account or in a stocks and shares investment without paying tax on it.

There are two types of ISAs:

Cash ISAs

Cash ISAs are essentially a bank or building society savings account that you don't have to pay tax on. The ISA acts as a 'wrapper' to the account, protecting your savings from the taxman. Without an ISA, if you're a basic-rate taxpayer you give 20 per cent of the interest earned on standard savings accounts to the government. Cash ISAs are available to any UK resident aged 16 or over.

Stocks and shares ISAs

Investments in stocks and shares investments (such as unit or investment trusts) can also be placed inside an ISA 'wrapper' to protect them from tax. Investing in stocks and shares can be highly profitable, but by their nature they tend to be more risky. Also, to get a decent return you normally have to be prepared to put your money away for a considerable time. Stocks and shares ISAs are available to any UK resident aged 18 or over.

HOW MUCH CAN I INVEST ?

Each financial year (6 April – 5 April) you have an ISA 'allowance' – the amount you're allowed to protect from the taxman. Currently the ISA allowance stands at £10,680. Up to £5,340 of this can be invested in a cash ISA, or you could invest the full £10,680 in a stocks and shares ISA. The other option is to 'mix and match' (eg, £5,340 in a cash ISA, and another £5,340 in stocks and shares). However you decide to use your allowance, if you don't use it before the end of the tax year (5 April) you will lose that year's ISA allowance forever.

MAKE MONEY SITTING AROUND

If you have time on your hands you could be making money, and saving on your fuel bills, by being a house-sitter. Agencies such as Homesitters and Mrs Hunt's Agency place housesitters around the country. You won't be expected to work all day; usually your duties will require a couple of hours and the rest of your time is yours, although they tend to want you to be in the house for as long as possible. Pay is generally between £9.50 and £10 a day, plus food and travel allowances. There may be extra for looking after dogs or cats. It's a great way for retired people and students to cut down on their bills and make some pocket money from their spare time.

Case Study:

In this current tax year, Jennifer has put £3,000 into a cash ISA. As of the new tax year (6 April 2012) she will open a new cash ISA and invest £5,340. She's also considering putting £3,500 into a stocks and shares ISA in that year, if she has enough put by. So, by the end of those two tax years, she'll have invested £11,840 and she won't have to pay tax on any gains she makes on it.

Withdrawing your money

An ISA normally allows you to withdraw your money whenever you want. However, depending on the ISA's terms, taking money out of it may affect your tax benefits. Consider this: Edward deposits £10,680 in an ISA, the maximum allowed. He then takes £2,000 for a family holiday. A couple of months later, he receives a bonus of £2,000 from work and decides to deposit it in his ISA. However, he's unable to do this because he has already contributed the full £10,680 allowed in that tax year and cannot invest any more money in this tax-saving product until the next tax year.

Cash or stocks and shares?

Which type of ISA you go for depends on your age and attitude to risk. I always put as much as I can into a stocks and shares ISA, usually an Index-tracking fund. This is because I see it as a longterm investment – part of my retirement fund – and in the longterm, stocks and shares always do better than savings accounts. Find out how to choose a good stocks and shares ISA at www.moneymagpie.com/article/best-equities-isas-shares. However, if you are 60-plus, you may be better off with a less volatile cash ISA as you might need to use the money sooner. There is more information on how to choose the best cash ISA at www.moneymagpiecom/article/best-cash-isas

Jasmine Birtles is a TV money expert and founder of Moneymagpie.com



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