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The Government state that they are keen to increase the
number of people in the UK who
save money to provide for the future. As we are all living
longer, the financial strain on the welfare state needs to
be assisted by people providing for themselves. Savings is
an area where the Government offers tax breaks as incentives,
but it is amazing to learn that around 25% of the UK population
has no savings at all.
Many ISA offers will be tempting, but before you make your
decision as to which one is best for you, it may be useful
to read the following comments.
ISAs are simple, flexible, tax-free savings plans that are
widely available and easy to set up. You can set up an
ISA without giving instructions in writing, which allows
them to be set up over the telephone or through the Internet.
The ISA manager will then send you confirmation of what
has been set up, which you can change if necessary.
You can also save in an ISA that will offer tax-efficient
savings through a wide range of investments. There are hundreds
of ISAs available but basically the come in two different
forms, investment (or stocks and shares) ISA and cash ISA.
Investment - which includes unit trusts, investment trusts,
investment companies with variable capital (ICVCs), gilts,
equities and corporate bonds. Cash - which includes bank
and building society accounts, National Savings and cash
unit trusts.
You can choose to invest in either element of the ISA depending
on your requirements and circumstances.
Anybody over the age of 18 is able to save using an ISA as
long as they are a UK tax
resident. You can take out an ISA even if you are not currently
working.
You and your partner are both able to set up an ISA as you
get separate ISA allowances. You cannot take out an ISA with
somebody else as each ISA must be individually taken out.
However, you can subscribe to an ISA on behalf of someone
else, for example as a gift.
1. ISA
type To 5th April each tax year
2. Investment
ISA Up to £7,000
3. Cash
ISA Up to £3,000
There is an overall maximum investment limit for ISAs in
each tax year and separate limits for each element as shown
above.
You can invest up to £3,000 cash in an ISA for the
current tax year.
If you have any cash sitting on deposit in the bank or building
society it may be advantageous to place some of this money
(having left yourself an adequate emergency cash fund) into
a cash ISA, because money on deposit with a bank or building
society is normally taxed at your highest rate of income
tax. Cash ISAs can include some National Savings products,
cash unit trusts and bank and building society accounts and
all interest will be tax-free.
The Investment element of an ISA can be in funds such as
unit trusts, ICVCs or Investment Trusts. You may also choose
to invest directly into shares or corporate bonds.
If you take out an ISA with cash elements, your remaining
allowance can be in an investment ISA. You may prefer to
invest your whole allowance in an investment ISA.
There are benchmarks set by the Government to provide assistance
to investors when choosing an ISA. They cover Cost, Access
and Terms. There are three sets of "CAT" standards,
one for each element of the ISA and the common themes are
as follows.
Clear straightforward treatment of investors and advertising
in plain English No requirement to buy another product An
undertaking that the provider keeps to the CAT standards
after the ISA is set up
However, a CAT marking is just a template for a certain
type of ISA. It does not necessarily mean that a CAT marked
ISA will be the best performing or the most suitable product
for you. In reality ISAs offer a broad range of benefits
and so the most suitable product for you depends upon your
needs and circumstances.
This is where our advice will prove invaluable.
There is a choice between many individual ISA managers.
Some managers only offer Cash ISAs. Others offer all the
elements.
Different providers inevitably offer different rates of
return, different charges and different levels of service.
It is likely that there will be marketing incentives such
as bonus points or other loyalty prizes offered by some providers.
Because of the large number of ISA providers and the different
types, it may be in your best interest to invest with two
separate ISA managers each tax year who specialise in that
particular area i.e. cash management and investment. This
is the area where we can advise you and help you make the
right choice.
The Government has introduced two different vehicles for
the ISA, the 'Maxi' and the 'Mini'. Within each of these
two vehicles there are several investment routes.
You can choose to invest through either of these two vehicles,
but you can't invest through both in the same tax year. Should
this be the case, your secondary investment will be void
and any tax advantages received will be repaid to the Inland
Revenue. Maxi and Mini ISAs differ in the following ways:
Maxi ISAs enable you to save the full £7,000 entitlement
in the current tax year in stocks and shares, potentially
the highest performing savings vehicle. Alternatively, in
the same tax year, you can save less than the full amount
into stocks and shares with up to £3,000 in cash.
You must select a single fund manager, and should remember
that you can only apply for one Maxi ISA in each tax year.
Mini ISAs allow you the flexibility to save with up to two
different ISA managers, enabling you to create an investment
portfolio ideally tailored to your needs. However, with Mini
ISAs, for the current tax year you can save £4,000
a year in stocks and shares - and no more than £3,000
in cash.
If you already have money invested in a Personal Equity Plan
you can leave it where it is or switch to another PEP provider.
PEPs were abolished in April 1999 and it is no longer possible
to invest any more money in a new PEP.
It may be worth continuing with your PEP as they offer similar
benefits to ISAs. This means no income tax, no capital gains
tax, a 10% tax credit on all dividends from UK shares within
this investment until 5th April 2004 (but after this date
the total credit will be nil), flexibility, the ability to
cash in at any time and a range of PEPs to match your needs.
The questions you should ask are:
1. Is
performance up to scratch?
2. Are
my income and growth needs met?
3. Are
the charges and return competitive?
4. What
happens to my regular payments in the future?
After April 5th 1999 investors
were also unable to take out a new Tax Exempt Special Savings
Account. However, you can continue to pay into an existing
TESSA for the full five years. Many ISA managers offer TESSA-only
Cash ISAs for investors who want to move the money in their
maturing TESSA into an ISA.
The investment limits for TESSAs taken out before 6th
April 1999 remained
at £9,000 over the five-year term.
Your ISA will benefit from tax-free growth, free of all income
tax and capital gains tax. UK shares
within the Investment are subject to a tax charge
on dividend income since 5th
April 2004.
There is no minimum period for ISAs and you can take money
out at any time without losing tax relief. This may not
be the case if you choose to save in an ISA that offers
extra benefits but gives less flexibility.
Remember that the investment ISA element should be viewed
as a medium to long term commitment (5 years+) and the value
of investments and any income from them may fall as well
as rise and investors may get back less than they originally
invested and past performance is no guarantee of future performance.
Speak to us about your ISA or reviewing your existing PEP
investments We can advise you on the best options available
to you. We will ask you about how much you can afford to
invest, what your aims are, when you need the money, the
risks you are prepared to take and explain anything else
you want to know about.
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