Individual Savings Accounts (ISAs)
Individual Savings Accounts or ISAs were introduced from 6th April 1999 and replaced personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). What you can now hold in ISAs you used to be able to hold in PEPs and TESSAs. By introducing ISAs the government of the day simplified the savings landscape. The bad news that came from this change was a general reduction in the amounts that could be saved or invested.
From 2014, the maximum contribution allowed to ISAs was increased and the rules relating to weightings of cash and investments in the overall allowance were relaxed.
No matter what the name, the intention from any government is the same; to encourage us all to put some money aside for the future.
ISAs have gone through a few changes over the last few years; these have mainly centred on structure and contribution levels. Today ISAs are simple and easy to understand:
Points to Note:
- The above options are maximums, less could be invested and the annual allowance would not fully be utilised.
- The ISA allowance is an individual allowance that if unused is lost. There is no way to go back to previous tax years or carry forward unused previous allowances.
- An individual investor needs to be a UK resident or ordinarily resident to make use of an ISA.
- It is now possible to make contributions and withdrawals as many times as you like in a tax year providing the net amount invested is below or equal to the allowance for that tax year.
A Cash ISA is like any other savings account offered by a bank or building society, with one important difference; any interest paid is not liable to tax, unlike savings accounts.
Income tax used to be deducted at source by your bank or building society but as of April 2016, banks and building societies no longer deduct tax at source and pay all interest gross. The savings allowance introduced at this time means that if your income in the form of interest is above the personal savings allowance you may owe tax on the excess.
As with all savings contracts the Cash ISA market is very broad and competitive. Providers may offer introductory rates or fixed rates of return depending on how long a customer remains invested. It is possible for previous years Cash ISA contributions to be converted to stocks and shares, this has no impact on the current year allowance. From April 2014, it became possible for stocks and shares to be converted back to cash.
Stocks and shares ISAs
A stocks and shares ISA can hold many different types of investments. Permitted investments include:
- Unit Trusts, OEICS, Investment Trusts,
- Listed Shares – including AIM Shares
- Fixed interest securities e.g. corporate bonds, gilts
- Any other FCA approved collective investment fund
When looking at this type of ISA you need to decide on whether you will buy and sell the individual assets (self-select ISA) or whether you will outsource this to a provider.
If you are not going to self-select then there are a number of key decisions to be made when deciding how best to make the investment:
- Who to buy from? There are many providers of stocks and shares ISAs, they are available through banks, insurance companies, platforms, wraps, fund groups.
- What kind of fund choice do you want? Some providers may have one fund some will offer thousands.
- What charges are you willing to pay? Initial charges can vary from 0% to 5% on the money you invest; then there are the annual charges – who gets them and what are they for? Are there charges to switch funds?
- How much flexibility do you need? If you later need to take some funds out, what is the minimum amount that must be left in to keep an account open?
- Is online access important to you? Can you view and make changes to your investments online or does the provider only issue paper statements?