Here’s our rundown of the 10 ISA traps you’ll need to steer clear of:
1. Thinking ISAs are no longer important
The big advantage of cash ISAs has always been that the interest you earn is tax-free.
However, as of April 6, 2016, basic rate taxpayers can earn £1,000 of savings interest a year in ANY savings account tax-free, while higher rate taxpayers can earn £500.
As a result, you might think there's no point saving in an ISA anymore. But that's not strictly true because any interest you earn from a cash ISA doesn't count towards this personal savings allowance, so it's worth making the most of both options - particularly if you have a lot of savings or are a higher rate taxpayer. You can read more about this here.
What's more, as of April 2016, you can replace any cash you have withdrawn from your ISA earlier in the tax year. Previously, if you had invested your full allowance of £15,240 and then withdrawn some of it, you couldn't top it back up again in the same tax year.
2. Investing in stocks and shares if you’re not comfortable taking risks
Since July 2014, it’s been possible to invest your full £15,240 into a stocks and shares ISA (or you can split your allowance between a cash and stocks and shares ISA in any division you like).
But if you decide to invest in stocks and shares for the first time, you’ll have to accept that the value of your investment can go down as well as up. On the plus side, if you are planning to invest for the long-term, stocks and shares historically have provided better returns than cash.
3. Forgetting you’ve got a Direct Debit into another ISA
If you make regular payments into one ISA, you can’t pay into another in the same tax year. If a different ISA has taken your fancy, then you’ll need to transfer the funds in your existing ISA over to that account, cancel your existing Direct Debit instruction and set another one up with your new provider.
4. Not keeping on top of returns
Just because the ISA you’ve chosen this tax year is paying a market-leading rate of interest, that doesn’t mean it always will. You’ll need to regularly check how much interest you are earning, and transfer your money if you find better returns elsewhere.
5. Withdrawing your cash when transferring your ISA
If you’re moving your ISA funds to a new provider DON’T withdraw the money from your account, or your ISA money will lose its tax-free status. Instead you’ll need to request a transfer form from your new provider, and they’ll arrange the switch on your behalf
6. Letting the bonus expiry date pass you by
If you’ve gone for a cash ISA which includes a whopping great bonus in the rate, make a note in your diary of when this will disappear. You’ll need to move your cash on or before this date if you want to continue to earn decent returns.
7. Going for a fixed rate account then needing your cash
You might be tempted to lock up your savings in a fixed rate ISA, but make sure you’re absolutely certain you won’t need access to it during the term. Most providers charge hefty penalties, usually a loss of interest, if you want to take out your money during the fixed rate period, so opt for a variable rate ISA deal instead.
8. Sticking with an under-performing stocks and shares ISA
If you’ve had a stocks and shares ISA for years and it’s been a consistently poor performer, you should give careful thought as to whether you might be better off cutting your losses and moving your cash elsewhere.
9. Paying too much for your ISA investments
Fund managers can charge initial fees as high as 5.5% when you open a stocks and shares ISA, and there’ll usually be an annual management fee of 1.5% to pay on top of this. You don’t need to pay this much though – charges are much cheaper if you invest through a fund supermarket or discount broker. Fund supermarkets can “bulk-buy” funds, giving big discounts on initial charges.
10. Limiting yourself to one fund a year
Don’t assume that if you want to invest in a stocks and shares ISA this year, that you’re restricted to just one fund. If you invest via a fund supermarket, you can split your allowance between several different funds. This helps to reduce risk, as even if one or more of your funds does badly, hopefully at least some of your investments will perform well.
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