What the new ISA rules mean for you

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02 October 2009

With the new ISA rules taking effect on the 6th October for the over-50s, moneysupermarket.com's editor Clare Francis talks to banking expert Kevin Mountford about the benefits of this new higher savings allowance... 

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Kevin Mountford: New Isa rules take effect on the 6th of October, which give the over-50s a higher allowance this tax year. All other savers will benefit from a higher allowance from April next year.

Kevin Mountford who is head of banking at moneysupermarket.com is with me to explain what the changes are and how we can all benefit from them.

Q1: So Kevin, can you just explain what is happening on the 6th October and which changes are taking place?

Kevin Mountford: Well basically you have a set allowance, so there are two Isa products in place at the moment. There's a Cash Isa version and a Stocks & Shares version.

So you have got an allowance at the moment of £7,200, of which £3,600, or up to, can be invested in cash. And because of a decision took by the Government this ear in the budget those allowances are actually going to increase.

So they start to increase from the 6th October for those people who are either 50 now or will become 50 during this financial year end, and then it will change for everybody else again from the next tax year

CF: - which is next April...

KM: Which is next April. So basically the overall allowances will go up to £10,200, of which £5,100 can be invested in cash and the rest up to the full allowance in stocks and shares.

Q2: And what's the value of Isas, why should we be taking advantage of them?

KM: Well basically we've been told for years now that we need to save more, we need to start thinking about our futures, and a real bugbear is that once we've got our hard earned cash and we put it into a savings account, and we earn interest, there's tax on that interest.

And clearly for most savers, if not all, it just seems unfair, and the Government is trying to give us some allowance against that tax burden by introducing a product which is called an Isa - individual savings account - which money put into that over years are ring-fenced and protected from any tax implications

So anybody who is paying tax, either on standard rate or in particular higher rate, should first and foremost be taking advantage of these particular products

Q3: And usually we tend to see a rush in the Isa market at the end of the tax year, so February / March and the beginning of a new tax year, April / May as people sort of look to take advantage of their Isa allowances. And from a provider's perspective, rates on cash Isas tend to get more competitive because they are chasing for that business.

But obviously because of these changes that are coming into effect now for the over-50s, now we're seeing a bit of a mini-Isa season at the moment so is it something we should all be looking to take advantage of?

KM: Yeah, it still bemuses me, the Isa season, as such (relatively speaking) it's quite a narrow season and it puts a huge burden on the industry - we hear horror stories of transfers taking so long etc. The landscapes starting to change, so in particular this year I think we've seen a longer season than we would normally, with attractive products still in play in June/July, several months after the start of the year.

But you're right. Pretty much now it would be flat until we come to March next year, but this mini Isa season - created because of the change in allowance for the over 50s from next month - will create a spike, and we're starting to see banks / building societies get ready for this with the introduction of new products and also maintaining existing competitive products as well.

Q4: And obviously the over-50s can benefit by being able to invest a higher amount - £5,100 into their cash Isa - but its not just them who can take advantage of these good deals at the moment because we can all invest even if we've got the lower allowance of £3,600? The fact that rates are still higher than they were two months ago means it could be worth investing your Isa now?

KM: Yes, very much so. You've got to be opportunistic and if a good products on the market I'd take advantage. You could always say 'well, I'll wait until next March, it might be better', but you would have earned several months benefit by acting sooner rather than later.

Q5: And you can also in some instances transfer money invested in previous tax years as well if the accounts become less competitive, without losing that tax break?

KM: Yes, and there's two elements to it. One of the changes in last year's budget, April 2008, allows simplification of transfer of cash Isa into stocks & shares, albeit not the other way around.

But yes, you're right, once you've taken out your Isa, as long as you keep it intact and don't take it out that tax-free product you can move to new providers should there be [a better product] - in most cases anyway, fixed rate products might be different - but as long as there's decent products available then you're free to move them around.

Q6: You mentioned fixed rate accounts there - effectively the Isa element is the tax-free 'wrapper' and the accounts underneath it are the same as standard savings accounts, so you can get fixed rate accounts, you can get easy access, variable rate accounts, and obviously the important thing is to look at the rate but also pick the right account that suits your needs?

KM: Yes, very much, so [for instance] you don't pick a fixed option unless you can afford to keep your money locked away for a given period of time.

But my advice would be that if you're fortunate enough to have a portfolio of products then the first thing you take out is your Isa. Equally the last thing you dip into is your Isa. So if you can have an Isa in a fixed product with some easy access money to support it - just to get you through those emergencies over that given period - then that's exactly the right thing to do.

Q7: Because obviously once you withdraw money from a cash Isa, that tax break is gone forever?

KM: It is.

CF: Great, thank you Kevin.

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