Tax Efficient Savings

ISAs are tax efficient and offer the potential for growth from some of the most exciting investment opportunities in the world - or greater security if required.

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.

What is an ISA?
Individual Savings Accounts are simple, flexible, tax-efficient savings plans that are widely available and easy to set up.

You can open an ISA without giving instructions in writing, which allows ISAs to be set up over the telephone or through the Internet. The ISA manager will then send you confirmation of what has been arranged, 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.

ISAs may have one or two separate components:

• Stocks and Shares – which includes equities, unit trusts, OEICs, investment trusts, life assurance, gilts and corporate bonds.
• Cash – which includes National Savings & Investment products, bank and building society accounts and cash funds.

Who can invest in an ISA?
Anybody over the age of 18 (16 for a cash ISA) 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.

How much can I invest? (Ages 18 - 49)
There is an overall maximum investment limit for ISAs, and separate limits for each element.

You can invest up to £3,600 in a cash ISA for the current tax year (2009/2010).

How much can I invest? (Aged 50 or Over)
There is an overall maximum investment limit for ISAs, and separate limits for each element.

You can invest up to £5,100 in a cash ISA for the current tax year (2009/2010).

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. This is 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 & Investment products, bank and building society accounts and cash funds, and all interest will be tax-free.

Stocks and Shares ISAs
The Stocks and Shares component of an ISA can be in funds such as unit trusts, OEICs or investment trusts. You may also choose to invest directly into equities, life assurance, gilts or corporate bonds.

A stocks and shares ISA can accept investments of up to £7,200, for people aged 18 - 49 and £10,200 for those aged 50 or over, for the current tax year (2009/2010). They offer a very wide choice of investments to choose from. An IFA can help guide you as to whether your money should be conservatively managed or can be more aggressively invested in the stock markets of the world.

Who will provide my ISA?
There is a choice between many individual ISA managers. Some managers only offer cash ISAs or only Stocks and Shares ISAs. Others offer both components.

Different providers inevitably offer different rates of return, different charges and different levels of service.

Because of the large number of ISA providers and the different types – from investment houses to supermarkets, it may be in your best interest to invest with two different ISA managers each tax year and with one or two different ISA managers who specialise in specific areas for the following tax years. This is where we can advise you and help you make the right choice.

What about the ISAs, PEPs and TESSAs I have previously invested in?
If you have invested previously in mini cash ISAs, TESSA-only ISAs (TOISAs) or the cash component of a maxi ISA, these will automatically from the start of the new tax year on 6th April 2008 become cash ISAs. You may have invested in mini stocks and shares ISAs and the stocks and shares component of a maxi ISA which will automatically become stocks and shares ISAs. All Personal Equity Plans (PEPs) will automatically become stocks and shares ISAs.

What are the tax advantages?
Your ISA will benefit from tax-efficient growth and you will not have to pay any income tax or capital gains tax when you cash in your ISA.

You do not need to declare your ISA on your tax return.

Can I dip into my ISA?
There is generally no lock-in period for ISAs and withdrawals are possible at any time, without loss of the tax advantages. This may not be the case if you choose to save in an ISA that, in return for offering extra benefits such as a guarantee, may offer you less flexibility.

Remember that a Stocks and Shares ISA 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. Past performance is no guarantee of future performance.