Have you chosen your ISA options for this year?There seems to be an assumption that everyone knows what an ISA is, but there's no reason why you should. So here's a brisk refresher course, whether you're an old hand at using them or new to the game:
Normally when you save money in a deposit account, any interest you receive has at least 20% deducted from it in the form of tax. However, a Cash ISA (Individual Savings Account) is a special type of account where the interest is paid tax-free.
It makes sense to choose this option if you want to save money in a low risk way, which is why the amount held in UK Cash ISAs in 2009/10 reached £200 billion.
There are two kinds of ISA – a Cash ISA and a Stocks and Shares ISA. During the current 2011/12 tax year, the ISA allowance is £10,680. This means you can place a maximum of £5,340 in a Cash ISA and the remainder in a Stocks and Shares ISA. Alternatively, you can put up to the entire £10,680 into a Stocks and Shares ISA.
To complement your 2011/12 allowance, you could consider transferring money from any ISAs you have taken out in previous years. If you have one that is languishing, perhaps because its initial rate has fallen, try to find one that provides a better return and allows you to transfer the money across. Think twice before moving money from an ISA into a normal bank account, though, because it will lose its tax-free status and a higher interest rate is unlikely to compensate for this.
A Cash ISA does actually operate pretty much like a normal savings account, except that tax is not deducted from the interest you receive, but always check you are happy with any terms and conditions such as penalties for withdrawals.
A Stocks and Shares ISA means your money is invested in the stock market, so you shift from everyday saving to investing and hence your money is at greater risk.
You can choose a Stocks and Shares ISA that is managed for you by the bank or financial organisation that provides it, or use one as a tax-free ‘wrapper’ for up to £10,680 of your own stock market investments. You then enter the realm of making your own investment decisions.
Article by 'What Investment' magazine.