You may have seen significant coverage given to the Which? ISA survey, in which they assessed the knowledge of bank ‘financial advisers’ on the rules surrounding cash ISAs. This was done using a small sample of 104, but does show that the level of knowledge appears to be low, or alternatively the banks are using misleading information to stop customers from switching their ISAs. In the survey, just 3 out of 104 bank advisers questioned gave correct answers to all 4 straightforward questions.
Why is this important?
ISAs are great for saving since the savings grow free of income tax and capital gains tax. Therefore, your savings will grow faster than taxable accounts. If you make the wrong move you will lose thw tax-free status of your account.
Under the rules, we can each save £10,200 per person per tax year into an ISA. Up to half of this amount is allowed in a cash ISA, the remainder in a stocks and shares ISA. What is often missed out in the information given out is that you can transfer existing and past year ISAs, although the banks often make this process difficult for their customers.
You can transfer your ISAs from one provider to another, so long as you go through the correct procedure. You should never take the money out and then reinvest. This would lose you the tax-free status on the money already accrued. Cash to stocks and shares You can choose to transfer your cash ISA savings into stocks & shares ISAs without losing their ISA status. For example, if you have previously been saving into cash ISAs, you could have a pot of money which could be switched into shares in addition to your allowance for this tax year. So, if you had accrued say £10,000 in cash ISAs, this could be switched into share ISAs, and you could then also invest this year’s allowance of £10,200. Stocks and shares to cash You cannot transfer from stocks and shares back into cash. Cash to cash You can transfer from one cash ISA to another while retaining your tax-free status. Stocks and shares to stocks and shares You can transfer from one stocks and shares ISA to another while retaining your tax-free status.
Things to be careful about!
You can only hold 1 cash ISA and 1 stocks & shares ISA in each tax year. Thus, you should be careful if you save monthly into either type of ISA as if you make a new contribution in the new tax year, you will be committed to that provider. If you accidentally start a new ISA, which is not permitted, the newer account will not be tax free. You can get around this by transferring your existing ISA from one provider to another. By doing this, your new ISA will be treated as if the original one had always been with the new provider. This means that you can still make use of the current tax year’s contribution allowance.
When should you invest in an ISA?
Almost everybody should save into an ISA, because most of the income and all of the capital gains are tax-free. Thus, if you pay tax on your earnings, you will avoid paying further tax on your savings and investments. Since the £10,200 annual limit is quite generous, you might therefore be able to save up to £850 per month without paying tax on your savings. This tax-free element will mean that you can make your money grow much faster. For example, if you have £5,100 saved in a cash ISA, and this grows at 5%, you will have £255 in interest before tax. If you are a higher rate tax payer, this will be taxed at 40%, meaning you will pay £102 in tax. This therefore reduces your interest to 3%, which is not as attractive!