Your ISA questions answered!

23 January 2014

We're always being urged to make the most of our annual ISA allowance before the end of the tax year on April 5, yet millions of people still aren't clear how ISAs work, or why this allowance is so valuable.

At MoneySuperMarket, our forums have been buzzing with ISA queries as the new tax year comes into view, so here, we answer all your ISA-related questions to clear up anything you might not be sure about...

1) What exactly is an ISA?

An individual savings account (ISA) is basically a tax-free wrapper in which you can shelter your savings and investment funds. You can either invest your whole annual allowance each tax year in stocks and shares, or you can split it and put a maximum of half in cash and the remainder in stocks and shares. Any interest or returns you make will be free of income tax or capital gains tax, so you don't have to hand over a penny to the taxman - or even declare it on your tax return.

2) Is an ISA the best savings vehicle for a large deposit?

If you are a taxpayer then usually yes, although it depends on exactly how much you have to invest. The maximum amount you can invest in a cash ISA this tax year (up to April 2014) is £5,760 in a cash ISA, and the same amount in stocks and shares, or you can invest the full £11,520 allowance in stocks and shares alone.

Remember that even though advertised returns offered by the top cash ISAs are lower than those offered by some taxable accounts, you'll usually end up with more money in your pocket with an ISA due to the tax breaks.

3) If I don't use this year's allowance, can I carry it over to next year?

No. If you fail to use your ISA allowance in any tax year, then it will be lost for good. The end of the tax year is always on April 5, so you have until this date each year to make the most of your allowance.

4) How much can I invest in an ISA next tax year?

Next tax year (2014/ 2015), which starts on April 6, the maximum ISA allowance rises to £5,940 in a cash ISA, and the same amount in stocks and shares, or you can invest the full £11,880 allowance in stocks and shares.

5) Can I move existing shares into an ISA?

No. You cannot transfer existing holdings directly into an ISA, although there are a few exceptions. You can, for example, transfer shares that have been bought though a savings-related share option scheme, an approved employee profit-sharing scheme, or an employee share ownership plan into an ISA. However, if you have shares bought outside one of these schemes, you'll have to sell them, put the money into your ISA and buy back the shares. This process is known as 'Bed and ISA'.

6) Can I open an ISA for my children?

You can only open a cash ISA once you reach the age of 16, or a stocks and shares ISA once you are 18, but children actually have their own Junior ISA allowance and parents or guardians can use this to invest on behalf of their children as soon as they are born.

Junior ISAs work in a similar way to normal ISAs in so far as you can either invest in cash or stocks and shares, or a combination of the two, except your child can't access any money invested for them until they reach the age of 18. At this point they can withdraw their money if they want to, and spend it on whatever they want. The maximum amount you can invest in a Junior ISA is £3,720 per child for this tax year, although this will increase to £3,840 from April next year. 

7) Can I withdraw my ISA savings using an ATM?

Cash ISAs are unlikely to come with a debit card, as they are a savings rather than a current account. However, you can usually move ISA money (provided you have invested in an easy access ISA) over to your current account easily enough, especially if you use internet banking. You can then withdraw your funds using a cash machine.

However, remember that once the ISA money leaves your ISA, the tax-free benefit is lost. In other words, if you have used your maximum allowance that tax year and then make a withdrawal, you cannot subsequently top up the account.

8) What happens to my ISA if I go abroad?

You can keep your ISA and will continue to receive tax relief on your savings and investments, but you cannot make any more contributions into the account. The only exception to this is if you are Crown employee working overseas, or if you are the spouse or civil partner of a Crown employee working overseas. If you move back to the UK at any point, you can then start putting money in again.

9) What if I've paid too much into my ISA?

If you've accidentally exceeded the maximum amount you can pay into an ISA in any tax year, then you won't be entitled to any tax relief on these excess payments. If your ISA is with the same bank as your current account, it will likely be spat back out. If it's not though, don't try and put your mistake right yourself - HMRC should get in touch with you after the end of the tax year to let you know what you need to do.

10) Can I have more than one ISA?

Yes. You can only open and pay into one cash ISA and one stocks and shares ISA in any one tax year, but you can keep these and open new accounts the following tax year if you want to.

11) Where can I find the best ISA deals?

Always shop around and compare different accounts, to make sure you find the most competitive rates possible. You can use MoneySuperMarket's cash ISA channel to see some of the top accounts currently available by clicking on 'see all cash ISA accounts'.

12) Can I move my ISA money into a different ISA account?

Yes. Plenty of cash ISAs accept transfers, but crucially you mustn't close down your existing account to transfer the money across, otherwise you'll lose the tax-free benefits. Instead, you must ask your new provider for an ISA transfer form and your new and old ISA providers will arrange for your money to be moved across. The transfer process should take no longer than 15 working days.

Remember that although you can move from a cash account to stocks and shares, you can't move from a stocks and shares ISA to a cash account.

13) Is it best to go for a cash ISA which includes a bonus in the rate, or one without?

Cash ISAs which include a short-term bonus usually offer the most competitive returns, albeit temporarily. If you do go for an ISA with a bonus, make a note of when the bonus disappears and transfer your money to an alternative account then. If you don't want the hassle of endlessly changing accounts, you might be better off going for an account with no bonus, but bear in mind that if it is a variable rate then it could still fall over time, so you may still need to transfer your ISA.

14) Can I earn more from a fixed rate ISA?

As a general rule, fixed rate ISAs pay higher returns than variable accounts, in return for you agreeing to tie up your money for the fixed rate period. However, be wary about locking up your cash for too long, as when interest rates do eventually start to rise, you could find yourself stuck in an account which is no longer competitive.

15) Which is better, a pension or an ISA?

Pensions and ISAs each have their pros and cons, so experts often suggest trying to invest in both if possible.

The big advantage of a pension is that you get initial tax relief and so your investment is given an immediate boost. This is particularly important for higher rate or additional rate taxpayers, who will benefit from 40% or 45% initial tax relief, especially if they might be basic rate or even non-taxpayers in retirement.

If you pay into a company scheme, then you are also likely to benefit from employer contributions too. However, you cannot access any of your pension money until you reach the age of 55. At this point most people will use their pension fund to buy an annuity, or income for life, but rising life expectancy and low investment returns have seen annuity rates tumble in recent years.

ISAs, however, are also tax-efficient and you are able to access your money whenever you like, making them much more flexible than pensions. If in doubt about where to invest, your best bet is to visit an independent financial adviser who can discuss which options are likely to suit your financial objectives.

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Melanie Wright


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