We explain how ISAs work and what the changes mean.
What are ISAs?
An ISA (individual savings account) is a tax-free savings vehicle. The fact that returns are tax free is a big advantage, as investments held outside an ISA wrapper are liable to income or capital gains tax.
How much can I invest?
From 6 October, the over-50s (and anyone who will be 50 on or before 5 April 2010) will be able to invest £10,200 into an ISA.
The annual allowance for savers under the age of 50 will remain at £7,200 until the next tax year, which starts on 6 April 2010, when it will also increase to £10,200.
How many ISAs can I have?
You can open one cash ISA, and one stocks and shares ISA each tax year.
Your annual allowance can be split 50:50 so half goes into a cash ISA while the other half can be invested in a stocks and shares ISA.
The new rules mean the over-50s will be able to invest £5,100 in a cash ISA (while the cash ISA limit for savers under 50 will remain at £3,600 until next April).
Alternatively, your full allowance can be invested in a stocks and shares ISA. The ISA is effectively a tax wrapper like a pension, so you can choose the underlying investments your money is invested in. Various non-cash assets can be held in a stocks and shares ISA, including unit trusts, investment trusts, open ended investment companies, bonds, individual shares and exchange traded funds.
Are all cash ISAs the same?
No. Cash ISAs are like any other savings account and there are a number of different types - easy access, fixed rate and notice accounts. Rates vary - you can compare the latest deals here.
There is one fundamental different between ISAs and standard savings accounts: tax isn't levied on the interest you receive from a cash ISA. Normally, higher-rate taxpayers pay 40% on any savings interest, while those in the basic-rate tax band pay tax at 20%. Therefore, if you are a taxpayer, it is well worth making use of your annual ISA allowance.
When comparing cash ISA deals, there are several things to bear in mind. As with standard savings accounts, fixed rate deals tend not to allow more than one investment. You can also not usually access your money during the fixed term.
And many of the leading easy access accounts include introductory bonuses so the account may lose its competitiveness once that ends - you should be aware of this and be prepared to move your money again at that point (you need to be careful when moving money from one cash ISA to another - see below).
I'm over 50 and have already opened an ISA this tax-year can I still use my extra allowance?
Yes, you should be able to top up the ISA you have already opened.
If it's an easy access cash ISA in the current tax year, you should be able to make additional deposits at any time as long as you don't exceed your annual allowance. Most providers have changed their systems so the over 50s can make use of their extra allowance. However, Egg has said it will not be accepting top-ups. Some of the small building societies may also be unable to take top-ups.
If you've opened a fixed rate account, you wouldn't ordinarily be able to pay in an additional amount. The main reason for this is because fixed rate savings accounts are priced differently than variable rate deals. As a result, fixed products tend not to be available for new customers for that long. Consequently, if you opened an account a few months ago, the provider is probably no longer offering a fixed account at that rate.
However, with the ISA rules changing, a number of banks and building societies have made an exception, and they will allow the over 50s to take advantage of their additional allowance and pay more into their existing fixed deal while still benefitting from the same rate of interest rate. The providers that have confirmed savers can do this include Halifax, Barclays, First Direct, and Chelsea Building Society.
If your ISA provider won't accept top-ups, you can open a cash ISA with another provider that will and transfer the money you've already invested this tax year over to the new account. However, you may be charged a penalty by your existing provider for doing so.
Can I transfer money I have invested in previous tax years?
You can transfer money invested in previous tax years without losing the tax-free status. However, you do need to be careful - if you close your existing ISA and then look to move the money into another account you will lose the tax-break.
When you apply for your new cash ISA, you will be asked if you want to transfer funds from another account. Your new provider will then arrange for the money to be moved across from your existing account.
However, some products are only available for new ISA money and transfers in aren't allowed - this is something to bear in mind when comparing deals.
Also, some providers will charge an exit fee when savers move money out of their cash ISA - another thing to note.
What if I don't use my full allowance?
If you don't make use of your full ISA allowance it will be lost - you can't roll it over in to the next tax year.
Can I switch between cash and equities?
You can move money from a cash ISA into a stocks and shares ISA, but you can't switch from equities to cash.
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