Top 10 tips for ISA season
With 2013 well underway, it can come as something of a shock to the system as you realise how quickly time flies by - and how easy it is to put off until tomorrow what should be done today. When it comes to money matters, the ISA season is a great example of a situation in which many of us are guilty of leaving things until the last minute.
With the tax year ending on 5th April, the next few months are an important time for both savers and investors. 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 - Remember the ISA deadline
The phrase 'use it or lose it' should be at the forefront of your mind right now, as the deadline for making your cash ISA deposit or stocks and shares ISA investment is 5th April 2013. You will need to check with your chosen ISA plan provider when they will need your application and possibly cleared funds, as many ISA providers have an earlier deadline.
You cannot backdate your 2012/13 ISA allowance - once the deadline has gone, that's it. The only thing worse than making an ISA investment at the end of the tax year is forgetting to do it altogether, so take action now.
Tip 2 - Maximise your ISA allowances
The maximum you can put into a cash ISA for the current tax year is £5,640 and the maximum you can put into an investment ISA is £11,280. Remember, even if you put the maximum into a cash ISA, you can still put up to £5,640 into an investment ISA. These allowances will increase, to £5,740 and £11,520 respectively, from 6th April 2013.
Money saved in a non-ISA account results in any income or growth being subject to tax. With basic rate income tax at 20%, this takes a headline interest rate of 3% down to 2.40% - based on £10,000 over five years, this equates to a difference of nearly £300. For a higher rate taxpayer the situation is even worse, taking your 3% down to 1.8% - which equates to a difference of nearly £600.
Remember that these allowances are per person, so if you're in a couple, you take advantage of this and invest up to £22,560 this tax year, rising to £23,040 from 6th April 2013 onwards.
Tip 3 - Understand the potential of your ISA allowance
It's always easier to brush aside things which we don't fully understand, and this sometimes happens with our valuable ISA allowance. There are very real benefits of putting money into an ISA, so don't miss out.
As an example, if you had invested the maximum into a cash ISA since April 2000, and it had grown at 5% per annum, you would have almost £60,000 at the start of this current tax year. If you had put the maximum into an investment ISA in April 2000, and this had grown at 7%, this figure would be almost £140,000.
Certainly, these are significant amounts, especially when all of this money will have grown tax-free, with no tax payable on either income or 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 in tax. An ISA offers a simple and straightforward way of saving and investing, whether for yourself or for your children.
Tip 4 - Check your current cash ISA interest rate
If you think your current cash ISA provider will offer you the best interest deal year after year, think again! And while we're on the subject, don't rely on them telling you that a better rate is available - even if it's a rate directly from them - because this won't happen. Always check the rate you're getting on your current cash ISA - this should be detailed on your statements. Rates change frequently, and many providers rely on savers not taking action, leaving them with a lower rate than would be available elsewhere in the market. You have the option of transferring your cash ISA, at no cost, if you are unhappy with your current ISA provider.
Tip 5 - Review cash ISA introductory rates
If you opted for a cash ISA deal with an attractive 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 will not be competitive. Cash ISA providers rely on customers to forget about the 'anniversary rate' - they know from experience that most savers will not be proactive in getting a better deal. Too many of us forget to take this kind of action, and chances are, you will need to transfer your ISA fairly frequently in order for it to remain competitive.
Tip 6 - Think about how soon you're likely to need access to your money
Typically with cash ISAs, the longer that you can afford to put your money aside, the better the interest rate you'll get. If you don't need 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. However, with the current low interest rates, locking up your cash seems to be less of a factor in getting a good rate right now. As with all financial decision-making, you should shop around to investigate the best deals available. If you are not sure, seek independent financial advice.
If you're looking to tie up your cash ISA savings for at least three years, you may also want to consider the wide range of structured deposits. These 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 five years. There's a wide choice of both growth and income investment plans, which can offer a defined return for a defined level of risk. You may also want to take a look at our ISA 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 very valuable - and they become more valuable over time. Therefore, you should try and make your ISA the last savings or investment pot that you dip into. Once you've taken money out, you might not be able to pay it back in, and therefore you'll forfeit some of your tax-free benefits.
Tip 8 - Don't forget the ISA transfer option
You can transfer all ISA holdings, whether they are in cash ISAs or investment ISAs, into a new ISA. This means that you can keep all your savings or 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. However, you cannot then transfer these funds back into a cash ISA.
The ISA transfer process is simple, be it for a cash ISA or investment ISA, and at Fair Investment we are here to help. Building on our many years of experience, we ensure that transfers are carried out quickly and smoothly.
Remember that if you are thinking of transferring your ISA, you should never just withdraw the money - if you do, you will lose all your tax-free benefits.
Tip 9 - The early bird often catches the worm
If you want to go one step better than making sure you beat the tax year deadline, why not sort out the following year's ISA allowance now? Here's why - if you invest £10,000 and receive 3% 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 £60 - and all for doing nothing other than being well-organised!
The Fair Investment Fund Supermarket can also help with your investment ISAs. Not only does this offer an attractive solution for consolidating your existing ISAs, 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 really is no excuse for waiting…
Tip 10 - Review ALL of the ISA options available
The range of options to choose from, spanning both cash ISAs and investment ISAs, is vast. What's more, it's growing day-by-day as the end of the tax year approaches. As the market develops, new opportunities constantly arise. With the current pressure on interest rates and the diminished range of fixed rate offerings, it's vital to do your research and consider all your ISA options carefully.
This time of year brings a high level of competition from ISA providers, all looking to persuade you that their ISA offering is the best destination your hard-earned money. Fair Investment provides an in-depth review of these offerings across both cash ISAs and investment ISAs, and our coverage is constantly being updated to reflect a selection of the best available deals on the market.
For a selection of the latest ISA deals see www.isa.co.uk
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.