Top ISA tips!

There are just over two months to go before the end of the tax year on April 5, so if you’ve yet to use this year’s individual savings account (ISA) allowance, you’ll need to get your skates on.

However, don’t rush in without understanding all the basics first. Here’s our round up what you need to know, along with some top ISA tips from the experts to ensure you make the best use of your allowance…

ISA limits rise!

There are strict limits on the amount you can invest in ISAs each tax year. This tax year which ends on April 5, 2014, you can invest up to £11,520 in ISAs. You can either put the full amount into a stocks and shares account, or up to £5,760 into a cash ISA, and the remainder into stocks and shares.

But from April 6, when the new tax year starts, you will be able to save £11,760 into ISAs, up to £5,880 of which can be held in cash.

If you don’t use your allowance, you’ll lose it

Don’t think you can just put off using your ISA allowance indefinitely. You cannot carry any unused ISA allowance over to the next year, so it’s a case of use it before the end of the tax year on April 5 – or lose it forever.

You only need £1

You don’t need a big lump sum to be able to open an ISA. Plenty of cash accounts can be opened with as little as £1, and, if you want to invest in stocks and shares you can usually invest as little as £25 a month.

Patrick Connolly, of independent financial advisors (IFAs) Chase de Vere, said; “You can invest either a one-off lump sums or regular monthly amounts. Investing regular premiums is suitable for those who don’t have large amounts to invest initially and allows them to build up a decent-sized ISA portfolio over time.

“Investing regularly also reduces risk if you are investing in stocks and shares because it negates the risks of market timing. If your investments fall in value you simply buy at a cheaper price the following month, reducing your average buying cost.”

ISAs don’t mean you lose access to your money

You don’t have to lock up your cash for several years if you invest in an ISA – most accounts enable you to withdraw your cash as and when you need it.

Darius McDermott, managing director of discount brokers Chelsea Financial Services, said; “You are not tied into an ISA as you are to a pension, for example. Even if a cash ISA has a fixed period in order to pay you a higher rate of interest, you can still get your money if you need it – you just forfeit the extra interest.”

Remember, however, that if you invest the maximum allowed in an ISA and then make a withdrawal, you cannot subsequently top up the account that same tax year as you will already have used your full allowance.

Your ISA rate can change – suddenly

If you’ve invested in a market-leading cash ISA, don’t assume that the rate will remain the same forever. Unless you’ve opted for a fixed rate account, your rate will be variable and can change at any time. Plenty of cash ISAs also include a short-term bonus in the headline rate too, so your returns can suddenly plummet after a year.

That’s why it’s important to regularly review the amount of interest you are earning, and make a note of when any bonus ends, so you can transfer your money to a higher-interest paying account.

You CAN transfer your ISA within the same tax year

If your ISA isn’t performing as well as you’d hoped, then you can transfer your money to a different account, even if it’s still the same tax year. Not all ISAs accept transfers however, so check to see if the account you are interested in moving to does.

You can transfer from a cash account into another cash account, or you can transfer from a cash ISA into a stocks and shares ISA (but not the other way round).

If you’ve only saved part of this year’s tax-free allowance with another provider you have two options.

You can transfer this portion of your ISA across to the new account and then top it up with your permitted remaining allowance. Or you can top up your existing ISA to the full allowance and then transfer the total cash to the new provider.

You will have to fill out a transfer form though which will mean your old account will be closed down once that year’s funds have been switched to the new one.

If you have balances accrued from previous years in a different ISA, you leave those untouched if you want to. But Richard Al-Dabbagh, head of savings at Santander, an ISA provider, said: “This would seem a bit convoluted. You may as well find the best-paying ISA deal, transfer all your ISA balances to that account and top up to your full annual entitlement. Then all your cash is earning the best rate in one place, tax-free.”

ISAs help you keep pace with inflation

Inflation, or the rising cost of living, is your biggest enemy as a saver as it gradually erodes the spending power of your cash. One of the best ways to beat inflation is to make the most of your cash ISA allowance each year, as returns are free of income tax.

Fortunately for savers, inflation fell to its lowest level for four years in December, dropping to 2%, so there are now plenty of ISAs which beat it.

Among the top inflation-beating ISAs is Virgin Money’s five year Fixed Rate Cash E-ISA Issue 62, which pays 3.00% AER on a minimum investment of just £1. However, you must be prepared to tie up your cash for the full five-year period, as you’ll lose 180 days’ interest if you withdraw your cash or close your account early.

You DON’T have to tell the taxman about your ISAs

Returns from ISAs are free of both income tax and capital gains tax, so you don’t have to tell HMRC about them or declare them on your tax return, if you have to fill one out. That’s one less lot of paperwork to worry about!

Cash ISAs are a better bet for short-term savings

When you’re thinking about whether to invest in a cash ISA, a stocks and shares ISA or both, think carefully about what you are hoping to eventually use your ISA savings for. For example, if you are saving for a property deposit and know you’ll need your cash within a year or two, your best bet is to go for a cash ISA.

If however, you are investing for the long term, for example you plan to use ISAs to supplement your pension when you retire, then stocks and shares may be your best option as they are likely to outperform cash accounts over a long-term period. If you are investing in stocks and shares, then over time you should look to build a balanced portfolio, so that you don’t end up with all your money invested in one particular asset or sector.

Martin Bamford, managing director at IFA Informed Choice said: “Investors should only pick funds for their ISA once they have decided on the purpose of the investments and the underlying asset allocation. Decisions made about how much to allocate to equities, fixed interest and property are far more important than fund selection decisions.”

Don’t base ISA investment decisions on past performance

Mr Bamford said: “When it comes to picking funds, look for those that offer a consistent track record, low charges and do not take too much risk to achieve their performance, known as risk-adjusted returns. Relying on past performance alone is a bad idea as funds that have performed well in the past are unlikely to perform well in the future.”

Patrick Connolly of Chase de Vere agreed: “Too many investors make the mistake of focusing on investments or funds which have done well in the short-term and ignoring those which have done badly.

“The result is that they can be over-exposed to investments as they peak and under-exposed to those which hit the bottom, reducing the diversification in their portfolio and increasing risks, especially if the fortunes of the two investments start to change.”

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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