Individual Savings Accounts were introduced in April 1999 to replace TESSA's and PEP's. Their main benefit to a saver is that they offer a return that is free from taxation. An ISA savings account is of particular benefit to higher-rate tax payers. This cash ISA guide aims to help savers to achieve the best possible return.
Individual Savings Account Limits
An investor can save up to £10,200 in a single tax year from April 6th 2010. The rules permit £5,200 to be invested in a cash ISA and £5,200 in a stocks and shares ISA. Alternatively, the full £10,200 can be invested in the stocks and shares element. Only one account can be opened in a given tax year for each element.
Unused ISA Allowance
An unused allowance cannot be carried forward. If money is deposited and withdrawn in the same tax year, it cannot be replaced. For example, if £2,800 has been paid in and £2,000 was withdrawn, it would only be possible to deposit £2,300 prior to April 6th.
Variable Rate Cash ISA
The amount of interest paid will move in-line with Bank of England base rates. A variable rate ISA is beneficial during periods of economic prosperity or rising inflation. It allows an investor to increase income when prices are rising quickly and the Bank of England is seeking to cool consumer spending through monetary controls.
Fixed Rate ISA
The best fixed rate ISA rates are locked for a period of 1, 3 or 5 years in order to provide a stable income. Withdrawing or transferring an Individual Savings Account will incur a penalty. This can create an issue in an emergency or when a better deal becomes available.
ISA Transfer
Should a cash ISA not offer the highest rate of interest, a transfer can be peformed. It is possible to identify the best ISA rates by using an online comparison site, such as uswitch.com. With literally hundreds of products available, it would be foolish not to use this service.
Never close down the account as the tax-free benefits will be lost. The ISA transfer is a formal process and can take up to 30 days to fully complete. The paperwork needs to be completed with the new provider and not the existing one.
A cash ISA should be the primary place for saving money because it places a tax-free wrapper around an investment. Always be careful not to tie-up any money in a fixed rate ISA if there is a likelihood that a short term financial emergency may arise. An ISA transfer may help a saver achieve better returns. Whilst this cash ISA guide provides answers to some important questions, it may be advisable to consult an Independent Financial Advisor (IFA) before proceeding.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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