A Basic ISA Guide

[platypus]

Please note that this is merely intended to be an informative guide. The material is for general information only and does not constitute investment, tax, legal or other forms of advice.
Mods - please feel free to edit/remove if you feel this is inappropriate - just thought I'd try to help a bit


The end of the current fiscal year is fast approaching (and I'm bored at work), and I have been talking to someone about savings. This kind of topic crops up a lot here, and also I've recently been advising two people on investing in ISAs, and thought I'd just jot down some useful information to help anyone else who either isn't sure about ISAs, is interested in investing, or simply wants to know more.


What is an ISA?
ISA - Individual Savings Account. There are two different types of ISAs - maxi ISAs and mini ISAs. The type of ISA dealt with here is the cash mini ISA.


The ISA is a government scheme designed to get people saving. It is offered tax free to encourage people to get into the swing of having investments. The basic premise behind it is to offer people a way into savings, so that when they breach the limit they start to pay tax on their savings - a valuable revenue stream for the government. That aside, it's simply a good way to save money, and you don't pay tax on it.


How does it work?
The fiscal year runs from April the 6th to April the 5th the following year. As of the thistax year, April the 6th 2012 to April the 5th 2013 - the cash, or mini, ISA allotment is now £5,640 . This figure is important to remember. Regardless of how much you take out from your ISA account, you can only invest to the maximum for the fiscal year. Example:

If you open a mini cash ISA and put £2,000 into it, the amount you can invest for the rest of that tax year is £3,640. Even if you withdraw £500 from the ISA halfway through the year, the maximum amount remaining for you to invest is still £3,640, not £4,140.

How can I invest?
You can only save in either one maxi ISA or up to two mini ISAs (one for each component), each tax year. You can't save money in both a mini and maxi ISA in the same financial year. Neither can you split your ISA provider in the same financial year.

Like any banking product, there are different ways to invest. Some only accept over the counter pay ins, most allow online access. Be careful and ensure that you read the terms and conditions before opening any account. Whilst most ISAs will allow instant "easy access" to your money, you may find that if you make a withdrawal, you won't earn any interest that month. My ISA for example has a 3 month notification period for withdrawals, but in return for this encumbrance I get a higher interest rate.


When should I invest?
As soon as possible! You won't earn any interest if you're not saving. And given the nature of the timing, it's getting more important that if you're going to invest, you do it now. The reason for this is after April the 5th, the investment wrapper for this year is gone. No more. Vanished. Even if you can only afford ~£100 to invest at the moment, do it as it means you can invest your full allotment on top of it next tax year. So you are simply maximising your investment potential.


Are my savings safe?
Given the nature of the current credit crisis, it is irresponsible to say that savings are safe. However, given the nature of risk based investments in the current financial climate, ISAs appear all the more attractive. They are covered by the Financial Services Compensation Scheme (FSCS), which agrees to protect 100% of the first £85,000 invested.


Who can open a (cash) ISA?
You have to be over 16, and a UK resident. You cannot open an ISA on behalf of someone else.


Useful links
http://www.moneysavingexpert.com/savings/best-cash-isa
http://www.moneysupermarket.com/savings/
http://www.thisismoney.co.uk/money/saving/article-1723571/This-Moneys-favourite-best-buy-Isas.html
http://moneyfacts.co.uk/compare/isas/cash-isas-variable/

 

[|Ric|]

A slight error, FSCS covers 100% of the first £35,000 now.
http://www.fscs.org.uk/consumer/key_facts/Limitations_of_the_scheme/Compensation_Limits/

This limit is per organisation so if you have a savings account at the same place you only get £35,000 total cover, not £35,000 per account type.
Also some of the banks are offering ISAs that are actually partially covered by their local equivalent (IceSave is actually Icelandic so the Iceland FSCS equivalent covers the first €20,000 and the FCFS the remaining bit)

Disclaimer: I am also no finance advisor type person!

 

[Mikoyan]

thanks for the info!

 

[hamesy]

Seriously dude that was great advice and cleared up some of my questions. I've been thinking about opening at ISA account for sometime now, always unsure about certain things. Like do you have to pay a certain amount in each year to keep it open. So for instance, if I'm having a rough patch with my money and only pay £100 in that year, would that be a major problem?

Always get confused over stuff like this. I only know how to spend money and not save

 

[Mad old tory]

Good work platypus. Hamesy, it depends on the account, but afaik there is generally no minimum you have to pay into an ISA each year

 

[|Ric|]

Like do you have to pay a certain amount in each year to keep it open. So for instance, if I'm having a rough patch with my money and only pay £100 in that year, would that be a major problem?

It will depend on the specific banks terms and conditions. Certainly some of the internet ones treat it very much like a normal savings account, i.e. as long as there is £1 in it then the account remains open. Basically an ISA is the best form of savings account assuming you actually want to save long term. This is because it is tax free so you get probably the highest interest rate possible, not so useful in the short term as it has the limit on how much you can put in a year (so you can't shove £1000 in it for 2 months, spend it, repeat 4 times a year for example)

It is also really easy to move your ISA between providers, but it is worth checking that your ISA provider doesn't have any penalties for this. Most don't it is just the odd bank that will.

 

[Andr3w]

What happens if you pay more than £3500/£3600 into the account?

Which are the best isa's to go for at the moment?

Thanks for the guide.

 

[Mad old tory]

What happens if you pay more than £3500/£3600 into the account?

Which are the best isa's to go for at the moment?

Thanks for the guide.

You can't pay more in; if you do, I assume you become liable for tax. Goto the MSE link above for best buys, Barclay's 6.5% isa looks pretty good as far as rates go, although i think 1% is a 1year bonus and I'm not sure of the other T&Cs

 

[platypus]

What happens if you pay more than £3500/£3600 into the account?

Which are the best isa's to go for at the moment?

As above, you won't be able too. My ISA for an example tracks how much I've paid in, and how much I can pay in for the remaining year. If I try paying in more, I get an error message saying "You are over your tax limit for the year."

 

[Burlsey]

Thank you Sir, ISA opened and money put in
Was wanting to open one anyway.

 

[Mikoyan]

anyone know any good ISA's I can open online? or do I have to go to the bank... got a normal savings account which i will move to the ISA!

 

[platypus]

anyone know any good ISA's I can open online? or do I have to go to the bank... got a normal savings account which i will move to the ISA!

Your best bet is to look at the bank websites, and those of online financial institutions. For example Egg are offering a nice ISA at the moment. Most will offer an online "e-ISA", and you'll get some nice introductory offers to try and squeeze you in before the deadline.

Check out the link to money supermarket, and just do a search for ISAs that fit your bill.

 

[Mad old tory]

I have the egg isa atm, think it's still about 6%. Shame I've only got £100 in it but saving is hard when on a student budget

 

[Mikoyan]

well thanks to this thread I have opened an ISA with Egg

 

[caff]

Neither can you split your ISA provider

I have a £3000 cash ISA with Egg, and a £4000 stocks & shares with Gartmore - am I not allowed to do this then?

 

[|Ric|]

I have a £3000 cash ISA with Egg, and a £4000 stocks & shares with Gartmore - am I not allowed to do this then?

Have a read here: http://www.hmrc.gov.uk/leaflets/isa-factsheet.htm

I think it sounds like you can have them if they were opened in different tax years.

Duplication

Remember

* you cannot open more than one Mini cash ISA, or more than one Mini stocks and shares ISA in the same tax year, and
* you cannot invest in both a Mini ISA and Maxi ISA in the same tax year.

Mistakes do happen. If you do invest in more than one ISA in a tax year, the second ISA will not be tax-free.
If this has happened call our ISA helpline. Have the details of your ISA accounts to hand when you call.

 

[PhilthyPhil]

I have a £3000 cash ISA with Egg, and a £4000 stocks & shares with Gartmore - am I not allowed to do this then?

You can do that, what you can't do is have say two £1500 cash ISAs. Also the max/mini definitions are going from next year along with some other changes which I can't remember off hand

 

[|Ric|]

You can do that, what you can't do is have say two £1500 cash ISAs. Also the max/mini definitions are going from next year along with some other changes which I can't remember off hand

I'm pretty certain you can have two mini-ISAs on the go, the only restriction is you can't open more than one in a tax year. This I am more certain on then the rules about maxi ISAs but I'm happy to concede I could be wrong.

 

[platypus]

I have a £3000 cash ISA with Egg, and a £4000 stocks & shares with Gartmore - am I not allowed to do this then?

Caff the basic guide is to cash ISAs only I'm afraid, I've little experience of stocks and shares. However - you have a maximum ISA wrapper of £7,000 (£7,600 from April 6th) into which you can invest tax free. The maximum you can invest in cash though is £3,000 (£3,600). This is known as a mini-ISA, and makes up the cash part of your tax-free allotment

You can do that, what you can't do is have say two £1500 cash ISAs. Also the max/mini definitions are going from next year along with some other changes which I can't remember off hand

I'm pretty certain you can have two mini-ISAs on the go, the only restriction is you can't open more than one in a tax year. This I am more certain on then the rules about maxi ISAs but I'm happy to concede I could be wrong.

Ric is correct here. You could in theory have four ISAs with four different providers, as long as they are opened in different fiscal years. However, given the nature of compounded interest, it really doesn't make sense to invest this way. A (cash) ISA should be invested in the same place. If you want to get a better interest rate, most ISA providers allow you to move your ISA. This is something you should look to do at the beginning of a new tax year, as you cannot move it if you have previously paid into it that fiscal period.

People with existing ISAs should be looking for special offers to move their ISA around every new tax year. I haven't found a better one yet, but if I get a better rate of interest for a year I'll move it .

 

[Mikoyan]

got a quick question...Just went on moneysavingexpert and it said

"If you have savings, and aren't using an ISA, then you're over-engorging the taxman's pocket. A Mini Cash ISA is simply a tax-free savings account; get the top payer and it's a big interest boost. You can deposit up to £3,000 between now and April 5, so go now and earn as much interest as possible. The ISA savings calculator will tell you exactly what this means for your money."

I have literally just opened one about 30 minutes ago.......can I deposit £3600 into it now and get the return

Or do I have to wait till next year???

Thanks