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/

 

[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."

 

[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.

 

[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 .

 

[platypus]

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

Until the 5th of April you can put £3,000. From April the 6th, you can invest in the new tax year a total of £3,600. So, if you have it - you can in theory put in £6,600 in the space of 2 days, but in reality it is over two different tax years.

You won't get a years interest on the £3,000 if you were to invest it now though.

 

[platypus]

So basically, to answer my questions:
- No overall limit, just a yearly one.
- Can be payed in with direct debit.

Can it be managed online if i take it out with my current bank?
Are all ISA rates, regardless of bank, the same?

Depends entirely on your bank.

I can manage my ISA online. ISA rates vary everywhere, just like any financial product. Look around for the best.

Just beware: Some offer a great introductory rate for a year, then for the next 12 months you get close to the base rate of interest - and some nasty penalties if you move.

However, if you shop around you can usually find great deals if you move your ISA once every 2 years or so.

 

[platypus]

Sorry that was not very clear. I meant you can't put your years £3000 allowance into two £1500 ISAs with different providers. I think this is correct...?

Correct.

 

[platypus]

i was more referring to clarify the tax free savings being split across different accounts.

I understand the max in per year being linked to a single provider. but lets example'ify (fry??? ) it.

year 1. input 3k into a cash isa with bank x
year 2. input 3k into a cash isa with bank y
year 3. input 3k into a cash isa with bank z

your interest earned with bank x and y will never be liable to tax? or does it become liable at the time you open a NEW isa, albeit a new tax year.

in theory you could open a new one every year (spread the love/eggs in one basket). not put any more into them. just sit on them and accrew interest.

is this correct?

In theory yes, but given the nature of compound interest, you would be losing money. Why would you do this?

 

[platypus]

well i actually got duped into opening a new account with portman, i went in to top up my isa last year (i never withdraw) and they suggested a notice account.

well of course i thought this was great due to the added interest, so off they went and put my 3k into a notice isa, but didnt transfer the old one...just opened a new one (staff commission bonus I assume) so now I have 2 x isa's with portman.

these accounts are now owned by nationwide, and i wont know what is happening until october as to interest rates and agreements etc.

it will all come out in the wash I am sure. going to pump it again in April (just topped it up for this tax year) then review my situation again.

Hmm, well if you can prove you were duped you could probably take your case to the financial obudsman.

However, to try and consolidate your seperate ISAs, I know my ISA allows a transfer in, so perhaps you could transfer one into the other thereby combining the two? Obviously without going over your limit.

You might find if its possible to do the above that it actually means you cannot then pay into the ISA for that tax year, but you would however have overcome the problem of having seperate ISAs. Worth looking into.

 

[platypus]

that was something I had thought about. effectively using one isa to top up the other one. it would take 2 whole financial years to do that.

certainly food for thought...thanks platypus.

It would, so you'd have to weigh up if the combined interest after 2 years would be worth the loss of 2 years investment. I'd hesitate it would be, if you could then move the whole ISA into one with a nice special offer, but I'll let you do the homework on that.

You're welcome .

 

[platypus]

What about opening several other ISAs with different banks/providers? How is this 'checked'? Is there some main authority from which these banks do a lookup?

Well it's quite simple really, when you open an ISA you sign a legal declaration saying that you have not opened an ISA with anyone else.

Banks share information and such, they have to provide the inland revenue with your account information so that they know not to tax the ISA wrapper. If more then one bank contact them trying to flog your tax free savings..

 

[platypus]

is this something that could be done by converting into a maxi allowance? and topping up with one into the "maxi" part of a new combined one?

I will be sitting pretty until NW have sorted out all their portman stuff I reckon. then time for action!

I'm afraid I don't know all the particulars of Maxi ISAs, and what they involve.

Mini cash-ISAs are strictly limited to £3,000 though. I guess you could buy £3,000 of shares, declare it under your wrapper and move it to the same manager as your cash ISA. Don't forget however that you cannot pay into a mini and maxi in the same year.

Again though I must stress I dont know enough about the maxi side of things. Your best bet is to talk to an IFA.

 

[platypus]

So if i want an ISA, whats a good one to go for?

For example, my bank offers:
- Mini Cash ISA - Opening account needs £10.
- Maxi Cash ISA - £50/month minimum.

But doesnt list the interest rates, or what it may or many not drop to after the first year?

You need to read the terms and conditions. Interest rates and everything will be included in that. Don't be tempted to go to your bank just because it's easier, you have to shop around.

Egg are currently offering a very good deal, as are IceSave. Go to the moneysupermarket link and search for eISAs based on whatever criteria you want.

 

[platypus]

Its not listed.
Ive even checked the PDF on their website, top to bottom, for the percentage.

Then go elsewhere.

 

[platypus]

Then go elsewhere.

A simple 10second search on moneysupermarket reveals:

 

[platypus]

it does look good actually.

It looks decent, but bear in mind:

The interest rate above is payable for 13 months from account opening. Following this the rate will revert to a variable 5.25% Gross/AER, depending on account balance.

Whereas the Egg one for example is guaranteed at 6.05% until 2009 (so 2 years if you open now).

You need to make sure you look at what the interest rates revert too, for example if you have a high introductory amount you may find you're better off going with a lower initial one, as that won't revert so drastically.

 

[platypus]

Dont get me wrong, if its still a good idea and someone can tell me why them im all for it. I just dont want to open one for the sake of it.

You may only have a small amount, but you still pay tax. The reason simply is that you will ultimately earn more money on your savings.

 

[platypus]

What restrictions are in place on that Barclays one? I know there's a 1% bonus involved but it's a full 12 months so surely could just transfer at the beginning of next tax year and any penalty would be minimal.

Well, the real penalty would be that if you moved your ISA - would that 1% bonus interest outweigh not being able to invest £3,600 next year? As moving your ISA counts for your limit being used up. 1% extra interest on £3,000 certainly would not be better then £3,600.

 

[platypus]

lol. Fair enough.
So which, on that money supermarket, is the best at this current moment in time?

I have to say the Egg one is looking pretty damned good at the moment.

 

[platypus]

So carrying out a transfer of an ISA is seen as opening up a new one?

I'm pretty sure this is the case, but will strive to find out.