Until 5 April you can invest £7,000 into an ISA each year, either through regular, usually monthly, savings or an annual lump sum. The returns from this investment, either in the form of income or capital gains, will be tax free.
From 6 April, however, you will be able to invest up to £7,200 each year into an ISA. But if you have not invested for the tax year 2007/08 you still have time to benefit from tax-free savings for this financial year.
Wrapping up your investments
An ISA is not an investment – it is a wrapper that creates a tax-free environment for your investment in stocks and shares, or cash. Again, under current rules, you can invest the whole of your £7,000 ISA allowance into a stocks and shares ISA, called a ‘maxi-ISA’. Or you can split your allowance and invest in two ‘mini-ISAs’, with up to £4,000 in stocks and shares, and £3,000 in cash. Once you have committed yourself to either a maxi or mini ISA you can’t, within that tax year, change your mind.
But this won’t be a concern for much longer because after 6 April the maxi/mini ISA options, which were deemed to be confusing for investors, will be abolished. The choice will be much simpler – you can either invest £7,200 into a stocks and shares ISA or £3,600 into a cash ISA and the remainder (i.e. up to £3,400) into a stocks and shares ISA. You will also be able to re-invest the £3,600 from cash into stocks and shares at a later date if you wish.
To make the definition clearer, however, within a stocks and shares ISA you can hold individual equities, or collective investment products such as unit trusts, investment trusts and open-ended investment companies (OEICs) and life insurance products.
Within a cash ISA you can hold deposit accounts from banks and building societies, national savings products and other cash-based products like money market funds.
There are also eligibility rules to ISA investing. You must be older than 16, although up until age 18 you can only invest in a cash ISA. You must also be a UK resident for tax purposes and you can’t invest in an ISA on behalf of anyone else or own one jointly with anyone else. But each individual can hold one, so couples would be able to invest £14,000 (or £14,400 after 6 April) in a tax-free wrapper each year.
Also under the new rules, if you have money in a child trust fund account, once the child becomes 18 that money can be rolled over into an ISA.
The key attractions
But why invest within an ISA? The real advantage is the tax-free aspect. You will not pay any capital gains tax on your investment as it grows or when you cash it in. There are also income tax benefits, in that money held in a cash ISA benefits from a 20 per cent tax reclaim. If corporate bonds are held with the ISA any interest on those have a 20 per cent tax-reclaim entitlement.
Higher-rate taxpayers benefit by being exempt from paying 32.5 per cent tax on dividends on equity investments within their ISA. While interest paid on cash held temporarily within a stocks and share ISA is taxed at 20 per cent, there is no further
tax payable for high-rate taxpayers, and there is no further liability to income tax on dividends received from your ISA.
The beauty of it all is that your ISA manager, unless they receive income gross of tax, will reclaim the tax savings from HM Revenue and Customs on your behalf. ‘Someone who started subscribing to an ISA when they launched in 1999 will, by next year, have had the opportunity to shelter almost £60,000 in subscriptions from CGT,’ says James Daly, a representative at online broker TD Waterhouse Investor Centre. ‘Though ISAs can reap significant gains for investors, they are also a cost-effective way for long-term savers to maximise returns on smaller contributions.’
He adds, ‘Even if the portfolio is modest today, small sums invested over ten years or more, if invested well, can grow significantly by the time the investor is ready to cash the ISA in. Anyone who is planning to invest more than a few thousand pounds
in the stock market can reasonably expect to make a capital gain in excess of their annual allowances at some time in the future, and by choosing an ISA carefully they can protect their investment from CGT in a cost-effective way.’
So you don’t have to invest the full annual ISA allowance. However, as Daly says, ‘An ISA can be particularly useful for higher-rate taxpayers after income, because it caps the tax on dividends at ten per cent, although it does not eliminate it like it used to, as the ten per cent tax credit on equity dividend payments within an ISA was abolished in 2004.’
Many ways to save
If you are investing for the first time there is a myriad of ways you can start ISA saving, either direct with the ISA provider, which could be a fund management house, bank or building society, or via an independent financial adviser (IFA) or a stockbroker.
Depending on the service you opt for, an IFA or stockbroker will either invest in the things you tell them to but advise you on where and when to do it, or manage your investments for you, in line with your instructions, on a discretionary basis.
You will, of course, have to pay for these extra levels of service and it is worth shopping around for the best deal – and for the IFA or stockbroker with whom you feel you can have a trusted relationship.
‘Novice investors can use a broker who will manage the ISA on their behalf,’ says Daly. ‘They will assist in the fund choices and keep the investor regularly updated on the ISA’s performance. If an investor wishes to manage their own ISA without advice they may want to consider using an online broker, for which the charges tend to be lower. To get the most from regular smaller investments, the charges to manage and trade within an ISA must be low.’
Generally speaking, a stockbroker will not offer cash ISAs. ‘Private client stockbrokers should be one of the first ports of call for direct investment into the stock market,’ says Derek Gawne, business development director at stockbroker WH Ireland, which has branches throughout the UK.
He adds, ‘As for whom should use stockbrokers, it depends on the risk profile of the individual and what they are looking for. Clients can have as much or as little involvement as they want. They can be an execution-only client, where they give instructions and choose their own investments, or they can have full discretionary status, where we do it all for them. Or there are the advisory services in between.’
There are also online stockbrokers whose transaction costs are lower, but where the stockbroker is literally just transacting your instructions and there is no advice. Gawne concedes that because the bulk of his business is advising investors, the charges
are not as cheap as for transaction-only brokers.
‘We believe we are adding value
for the charges,’ he says. ‘We charge
a percentage of the value of each transaction based on what has been agreed with the client. We believe it
is the relationship that matters, and the individual client has a client adviser here who would be their
main contact.’
A broad spread
The key aspect of any investment is
to diversify – to spread your assets across a range of different investments. In that way, you have a chance of offsetting losses from one sort of investment against gains in another.
Once you are invested in an ISA, your money is not locked away: you can withdraw it at any time. But you must bear in mind that if you do, you use up the respective tax-free portion of your annual ISA allowance for that year.
ISAs have to be top of your list as an investor. If you have a lot to invest it makes sense to invest in ISAs first off to get the tax-free savings. If you have a little to invest the same argument stands. You may want to be saving for the short or long term, but you can access your money from an ISA so they can suit savings for the proverbial rainy day, school fees or special holidays, or for the longest holiday of all – retirement.
source:http://www.whatinvestment.co.uk/saving-money/saving-and-banking/306816/making-the-first-move.thtml
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