In a recent poll on moneysupermarket.com, 37% of people said they weren’t going to use their ISA allowance, and one of the main reasons for this is confusion about what ISAs are and how they work.
What’s more, the ISA rules change on the 6th April - this is when the new tax year begins – yet separate research from the National Savings & Investments found that lots of people aren’t aware of this. 25 % of respondents said they had no idea the ISA rules were changing, and only 15% said they did understood what changes were taking place.
So Kevin Mountford, who is moneysupermarket.coms head of banking, is with me to explain exactly what ISAs are and help your understanding of them.
Q1: So Kevin, let’s start with the basic question – can you just explain what exactly an ISA is?
KM: Basically it’s an Individual Savings Account, so it’s a vehicle that allows people to save money whereby they don’t have to pay tax on the interest earned. It can either be just cash or just stocks and shares, or a combination of both.
Q2: And how much can you put into an ISA?
KM: At the moment it’s £7,200 for most people, albeit that last October that was increased to £10,200 for people over 50. That means that half of that allowance can be used for cash, half for stocks and shares, or the total allowance can be used for stocks and shares.
Then, from April 6th, the allowance for everybody increases to £10,200. So you’ve either got £10,200 for stocks and shares, or £5,100 for cash and £5,100 for stocks and shares.
Q3: And that’s the rule changes that we mentioned in the introduction, that a lot of people are seemingly not aware of at the moment?
KM: Yes. I mean, we saw a slight spike in terms of customer interest last October, when the allowances were increased for the over-50s, so there was a degree of awareness. But as we see time and time again, through various surveys we run, there is still a degree of confusion around this.
Q4: I was going to say that, because I think confusion is one of the reasons why so many people fail to take advantage of the ISA allowance each year – would you agree with that?
KM: Yes definitely, and there have been efforts to try and simplify it, but I just think sometimes its industry jargon and people believe it’s more complex than it actually is. The industry – i.e. the banks, the building societies – do make it quite simple. So the savings products that I referred to are clearly identified that they come with this ‘tax-free wrapper’, hence the reasons they’re called ISAs. You’ve got a certain amount of money you can save. There are one or two little nuances around the fact that you can only have a new account each year, then there’s the element of transfer around it as well.
But yes, there is definitely some confusion, which is unfortunate really because for anybody who is paying tax, the first thing they should do when saving money is use their ISA.
Q5: Because I think one of the things that puts people off is the fact that if you want to invest the full allowance obviously you’ve got to take out a stocks and shares ISA, which means investing in equities or bonds, and assets that perhaps some people aren’t comfortable with or don’t fully understand. But even if you don’t want to invest in the stock market obviously there is the cash ISA element that you mentioned before which is 50% of the annual allowance, and that’s just like any other savings account isn’t it, albeit your interest is tax-free, so is it the sort of thing that everybody should be looking to use at least some of their cash ISA allowance each year, even if they don’t want to go into stocks and shares?
KM: Yes, the complexities that you refer to in terms of any type of stocks and shares investment is the same whether it be an ISA or not. So I mean clearly if you’re unsure then you need to take some form of advice.
In terms of the cash element, that’s still £3,600 now, moving up to £5,100 – it’s a meaningful amount of money if you think of the tax that you’ll pay on the interest earnings from those, so it is basically just a variation on a type of cash savings.
Q6: And with bank base rate at such an historic low, and inflation rising, it makes ISAs look even more attractive at the moment doesn’t it?
KM: It does, I mean even standard rate tax, but more importantly for anybody who is on a higher rate tax, then it’s a no brainer. You have got to utilise these tax free products that are available.
Q7: And what about people who have invested in cash ISAs in previous tax years? As well as looking for the best rate available now – for this year's allowance – it’s also worth reviewing any existing ISAs you have already got as well, isn’t it?
KM: Yes, and I think this again is part of the confusion, because we continue to reiterate the fact that you can not take your money out of an ISA - because then you have lost that tax free allowance - but you can transfer money within that tax free wrapper, and clearly the banks and building societies can facilitate that for you.
But because of the confusion, I think people tend to think that once the money is invested, there is nothing they can do about it and unfortunately rates over time start to erode and then basically there will be a lot of people who have got historic ISA money in accounts that are paying woeful interest rates.
So, as part of this peak ISA season, its not only considering where you are going to put your new money but also look back at existing savings, and see where you can transfer them to.
Q8: The key thing being that you mustn’t close your existing accounts and then move the money, because then you will lose the tax break – it’s applying to make a transfer when you apply for a new account?
KM: Yes, and as I say, its quite clear on the application form, so as long as you stipulate that there is a transfer element then the two banks or building societies, i.e. the one you are with at the moment, the one you want to move with, will facilitate this process for you.
Q9: But not all accounts accept transfers in, do they?
KM: No they don’t, and often you will see some of the best paying accounts don’t by virtue of the fact that the bank/building society wants to limit its exposure. So it’s happy enough for you to invest £3,600 or £5,100 under the new regulation, but what it would be fearful of is you, having built up your ISA stock over the years since its been in existence, possibly moving £30,000 plus.
Q10: So, the key message is, even if you don’t want to invest in stocks and shares at least make use of your cash ISA allowance this year?
KM: Most definitely because if you don’t use it, you’ll lose it. It’s a great opportunity to get tax free savings.
CF: Great, thanks Kevin.