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.
ISAs are simple, flexible, tax-free savings plans that are
widely available and easy to set up. You can set up an
ISA without giving instructions in writing, which allows
them to be set up over the telephone or through the Internet.
The ISA manager will then send you confirmation of what
has been set up, 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.
There are hundreds of ISAs available but basically the come
in two different forms, investment (or stocks and shares)
ISA and cash ISA.
Investment - which includes unit trusts,
investment trusts, investment companies with variable capital
(ICVCs), gilts, equities and corporate bonds. Cash - which
includes bank and building society accounts, National Savings
and cash unit trusts.
You can choose to invest in either element
of the ISA depending on your requirements and circumstances.
Anybody over the age of 18 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.
1. ISA
type To 5th April each tax year
2. Investment
ISA Up to £7,000
3. Cash
ISA Up to £3,000
There is an overall maximum investment
limit for ISAs in each tax year and separate limits for each
element as shown above.
You can invest up to £3,000 cash
in an ISA for the current tax year.
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, 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 products, cash unit trusts and bank and building
society accounts and all interest will be tax-free.
The Investment element of an ISA can be
in funds such as unit trusts, ICVCs or Investment Trusts.
You may also choose to invest directly into shares or corporate
bonds.
If you take out an ISA with cash elements,
your remaining allowance can be in an investment ISA. You
may prefer to invest your whole allowance in an investment
ISA.
There are benchmarks set by the Government
to provide assistance to investors when choosing an ISA.
They cover Cost, Access and Terms. There are three sets of "CAT" standards,
one for each element of the ISA and the common themes are
as follows.
Clear straightforward treatment of investors
and advertising in plain English No requirement to buy another
product An undertaking that the provider keeps to the CAT
standards after the ISA is set up
However, a CAT marking is just a template
for a certain type of ISA. It does not necessarily mean that
a CAT marked ISA will be the best performing or the most
suitable product for you. In reality ISAs offer a broad range
of benefits and so the most suitable product for you depends
upon your needs and circumstances.
This is where our advice will prove invaluable.
There is a choice between many individual
ISA managers. Some managers only offer Cash ISAs. Others
offer all the elements.
Different providers inevitably offer different
rates of return, different charges and different levels of
service. It is likely that there will be marketing incentives
such as bonus points or other loyalty prizes offered by some
providers.
Because of the large number of ISA providers
and the different types, it may be in your best interest
to invest with two separate ISA managers each tax year who
specialise in that particular area i.e. cash management and
investment. This is the area where we can advise you and
help you make the right choice.
The Government has introduced two different vehicles for
the ISA, the 'Maxi' and the 'Mini'. Within each of these
two vehicles there are several investment routes.
You can choose to invest through either
of these two vehicles, but you can't invest through both
in the same tax year. Should this be the case, your secondary
investment will be void and any tax advantages received will
be repaid to the Inland Revenue. Maxi and Mini ISAs differ
in the following ways:
Maxi ISAs enable you to save the full £7,000
entitlement in the current tax year in stocks and shares,
potentially the highest performing savings vehicle. Alternatively,
in the same tax year, you can save less than the full amount
into stocks and shares with up to £3,000 in cash.
You must select a single fund manager, and should remember
that you can only apply for one Maxi ISA in each tax year.
Mini ISAs allow you the flexibility to
save with up to two different ISA managers, enabling you
to create an investment portfolio ideally tailored to your
needs. However, with Mini ISAs, for the current tax year
you can save £4,000 a year in stocks and shares -
and no more than £3,000 in cash.
If you already have money invested in a Personal Equity Plan
you can leave it where it is or switch to another PEP provider.
PEPs were abolished in April 1999 and it is no longer possible
to invest any more money in a new PEP.
It may be worth continuing with your PEP
as they offer similar benefits to ISAs. This means no income
tax, no capital gains tax, a 10% tax credit on all dividends
from UK shares within this investment until 5th April 2004
(but after this date the total credit will be nil), flexibility,
the ability to cash in at any time and a range of PEPs to
match your needs.
The questions you should ask are:
1. Is
performance up to scratch?
2. Are
my income and growth needs met?
3. Are
the charges and return competitive?
4. What
happens to my regular payments in the future?
After April 5th 1999
investors were also unable to take out a new Tax Exempt Special
Savings Account. However, you can continue to pay into an
existing TESSA for the full five years. Many ISA managers
offer TESSA-only Cash ISAs for investors who want to move
the money in their maturing TESSA into an ISA.
The investment limits for TESSAs taken
out before 6th April
1999 remained at £9,000 over the five-year term.
Your ISA will benefit from tax-free growth, free of all income
tax and capital gains tax. UK
shares within the Investment are subject to a tax
charge on dividend income since 5th April 2004.
There is no minimum period for ISAs and you can take money
out at any time without losing tax relief. This may not
be the case if you choose to save in an ISA that offers
extra benefits but gives less flexibility.
Remember that the investment ISA element
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 and past performance is no guarantee
of future performance.
Speak to us about your ISA or reviewing
your existing PEP investments We can advise you on the best
options available to you. We will ask you about how much
you can afford to invest, what your aims are, when you need
the money, the risks you are prepared to take and explain
anything else you want to know about. |
