ISAs – the smart saving option
Research has shown that investors are still paying out more than £260 million in unnecessary tax because they are failing to put their money in tax efficient vehicles such as ISAs. With the new tax year upon us, now is the perfect time to get in place your ISA requirements for 2009/10.
What exactly is an ISA?
It’s simply a wrapper around a cash account or other eligible investments. The advantage of putting money into an ISA, as opposed to directly into these investments, is that the ISA offers tax benefits as you won’t pay any income or capital gains tax while you hold the ISA.
So for example, say as a higher rate tax payer, you earned £500 interest on a standard savings account, you will have to give 40% of this interest to HM Revenue and Customs – that’s £200 you’ve given away. Had this money been placed in an ISA savings account, you would have pocketed the full £500.
Are all ISAs the same?
There are two types of ISA – cash and stocks and shares. Most cash ISAs resemble bank or building society accounts but can also be bought through investments such as unit trusts, which invest in cash funds. Stocks and shares ISAs can be made up of one or more investment fund or individual stocks and shares.
Is there a limit to the amount I can invest?
Because of the tax advantages of ISAs, individuals are only permitted to hold one of each type each tax year. There is also a limit on the amount you can invest, which is currently £7,200 per year. This can be placed in total into a stocks and shares ISA or divided by paying up to £3,600 into a cash ISA and the remainder to a stocks and shares ISA.
Which is the best ISA for my needs?
Whether you choose to place your money in a cash or a stocks and shares ISA will depend on a number of factors. You need to think about how long you want to save for, what your saving objectives are and what is your own attitude to risk with money. If you are looking for a short-term investment or you want easy access to your cash, then a cash ISA is probably the best option for you. However if you want to save for the longer-term, to build a nest egg for your pension or children’s university fees, then share-based investments have historically provided better returns than cash over the long term.
We have seen periods in the past when the stock market has run into difficulty but history has shown equities have continued to outperform other types of investment over the long term. Although, of course, past performance should not necessarily be taken as a guide to future performance.
One way to take advantage of the current volatile stock market is to invest on a regular basis into a stocks and shares ISA. Buying shares on a monthly basis, for example, means you limit the impact of short-term peaks and troughs that can have a negative effect on your investment. As the market goes up you will purchase less shares with your cash but when it’s going down you buy more. You therefore give yourself the chance to make higher returns on average than you would by investing a one-off lump sum. However, you do delay the investment growth that a single investment would give you.
For many people, who feel that investing in the stock market is too risky, stocks and shares ISAs offer a middle ground as they are professionally managed and invest in shares from both the UK and overseas.
How do I choose the right ISA?
There are so many companies offering ISA products it’s hard to know how to choose the right one for your needs. Also given the events of recent months, you also have to consider carefully who you can trust with your money. One of the main things to consider before you commit any money is the financial strength of a provider. Financial strength means that a company can meet its ongoing guaranteed or promised commitments and it is usually measured by the amount of money a provider has left over after they have met all of their liabilities. A company’s size is no indication of financial strength and smaller mutuals can fare much better than the insurance giants in this regard.
So make sure you get your ISA plans in place to take advantage of the tax free benefits and be a smart saver.
• Wesleyan Medical Sickness provides specialist financial advice for the dental profession. For information call 0800 294 8306 or visit www.wesleyanmedicalsickness.co.uk.
Reference (1): Source – unbiased.co.uk