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Your top ISA questions answered

saving money in a piggy bankWe recently ran an ISA surgery inviting you, our readers, to send us your ISA questions and confusions. got together with Fair Investment, the Tax Incentivised Savings Association (TISA) and the Buildings Societies Association to help clear up some of your most common queries and misunderstandings. So without any further ado, here they are...

1: What is an ISA?

An ISA (otherwise known as an Individual Savings Account) is different from a normal savings account because it allows you to save up to a specific amount each year tax free.

2: How much can I save into an ISA?

The ISA savings limit is currently £7,200 for the under-50s and £10,200 for the over-50s for the 2009-10 tax year. After 6 April 2010, the ISA investment allowance is increasing for everyone to £10,200.

For the over-50s, up to £5,100 of their £10,200 can be held in a Cash ISA, with the other half permitted to be invested in stocks and shares.

From April, these limits will be matched for the under-50s. Until then, half of the £7,200 limit can be saved in a Cash ISA with one provider. The other £3,600 can be invested in stocks and shares with either the same or another provider.

3: Where can I get an ISA?

You can get an ISA by going to an ISA Manager. ISA Managers can include anyone from banks, building societies, National Savings and Investments, insurance companies, unit and investment trust companies, financial advisers, fund supermarkets, stockbrokers and even some retail stores and supermarkets. Always shop around for the best rate and deal.

4: Providing I do not exceed the permitted maximum amount, can I open or invest in more than one ISA per year?

There are limits on the number of ISA accounts you can subscribe to each tax year. You are allowed to hold both one Cash ISA and one Stocks and Shares ISA, but cannot subscribe to more than one of the same type during any one tax year.

5: Can I dip into my Cash ISA when I need to access money?

This depends. Some accounts will impose a penalty for doing so, and even if they don’t, you will lose the tax-free benefit from any Cash ISA if you withdraw money from it during the tax year. In short, withdrawing money from your ISA should really be a last resort.

6: What is a Stocks and Shares ISA?

A Stocks and Shares ISA enables you to invest in qualifying investments such as the stock market.

If you wish to hold shares through an ISA you need to find an ISA Manager who offers a Stocks and Shares ISA and allows directly held investments. Stockbrokers offer this type of ISA, as do the stockbroking arms of the high-street banks and many other providers.

It is important, however, to assess your attitude to risk before investing in stocks and shares, because the returns are not guaranteed.

7: What are the benefits of Stocks and Shares ISAs vs Cash ISAs?

Stocks & Shares ISAs hold stock market investments, which should provide a better return over the long term (at least 5 years).  However, this comes at the price of exposing your savings to a level of risk - this could be anything from slightly higher than that associated with deposit accounts (such as Cash ISAs), to a very much higher level of risk.

It all depends on the risk profile of the chosen investments, and you should be clear what your attitude to risk is before committing to an investment.

8: If I take out a Cash ISA and a Stocks and Shares ISA, do I have to hold both with the same provider?

If you decide to subscribe to both a Cash ISA and a Stocks and Shares ISA in the same year, it is entirely your decision whether you hold both with the same ISA Manager or with different ones.  If you choose to use different managers, remember to limit your Stocks and Shares ISA subscriptions so that between the two ISAs you do not exceed the overall limit.

9: What are the risks with Stocks and Shares ISAs?

The risk of investing directly in shares is that your investments can go down as well as up. Indeed, in a worst case scenario, if the company goes bust you lose your money. Whether you hold the shares inside or outside an ISA wrapper makes absolutely no difference to the risk.

However, equities also have the potential to earn more than Cash ISAs, and you can spread the investments in your Stocks and Shares ISA among a variety of different funds or companies to spread your risk if you want to.

It’s worth thinking about the level of risk (if any) you want to take, and also the length of time you’re willing to lock money away. Many experts advise that you should be prepared to maintain your investment for at least five years if you are to get a good return on a stocks and shares ISA.

10: If I move my ISA savings to another provider and it takes 30 days to complete the transfer, does that mean I have lost 30 days interest?

HM Revenue & Customs rules allow the existing ISA Manager a maximum of 30 days to respond to the new ISA Manager’s request and complete the transfer but it can be done in a shorter time.

Interest should not be lost for the entire transfer period it may be that, in some cases, a day or more interest may be lost depending on the provider.

11: Is it possible to transfer a Cash ISA to another provider part way through a tax year and is a partial balance transfer possible?

The ISA Regulations require all ISA Managers to allow you to transfer your ISA to another ISA Manager at any time, although the terms and conditions of some ISA products (e.g. term deposit accounts) may incur a penalty if the transfer request is made before the term has expired.

If subscriptions have been made to the ISA during the current tax year, the investor can make further subscriptions to the new ISA Manager after the transfer (subject to the relevant ISA subscription limits for that tax year).

Although the Regulations allow Managers to make partial transfers, they are not obliged to offer this facility (check with your ISA Manager).Where a partial transfer is made, the current year cannot be split – it must either remain entirely with the existing Manager or be transferred entirely to the new manager. Previous years can be split in any way agreeable to investor and ISA Manager.

12: Is it possible to transfer money from an existing ISA to another ISA (without making any further contributions into it) and in the same tax year opening a new Isa with a different provider?

You cannot transfer money from one ISA to another ISA.However, you can transfer the ISA to another ISA Manager or provider. If you have not subscribed during 2009/10 to your current Cash ISA, there is nothing to stop you opening a new Cash ISA with any ISA Manager, irrespective of whether your current ISA is transferred or left where it is.

13: How do I instruct an ISA transfer?

If you wish to transfer your existing ISA from Manager A to Manager B, you should approach B and request that he arranges for your existing ISA with A to be transferred. You will need to complete an instruction giving B various information. This will include:

  • Your personal details, address, date of birth, National Insurance Number
  • Name of existing ISA Manager and contact address (see your statement or other documentation)
  • Whether you want the whole account transferred (i.e. whether this is to be a full or partial transfer) [if necessary, check whether Manager A offers a partial transfer facility – they are not obliged to.]
  • Whether you have made any subscriptions during the current tax year to the ISA being transferred
  • If the terms and conditions of the ISA being transferred include penalties (e.g. for early withdrawal), whether you want to give due notice so that the transfer does not take place until after the necessary notice period.

14: Can I put shares I already own into an ISA? Do I have to sell and then rebuy them to do this? And is there a Capital Gains Tax (CGT) liability attached?

If you bought shares in XYZ plc some years ago for, say, £1,000 and would prefer now to hold them in your ISA, you can ask an ISA Manager to sell them on your behalf and then immediately buy them back for your ISA. If the manager sells them for, say, £2,500, then you have made a capital gain of £1,500 in the current tax year and the subscription to your ISA is £2,500 which has been used to buy shares in XYZ plc.

Any future capital gain on these shares, which are now inside the ISA, will be free from CGT liability. The process described above is sometimes known as a “Share Exchange” or a “Bed & ISA”.

If you are entitled to shares from a Savings-Related Share Option Scheme or a Share Incentive Plan then you are entitled to have the shares transferred into your ISA within 90 days of them emerging from the scheme.  This is the only exception to the rule that you cannot put shares you already own into an ISA.

15: With regard to Equity ISAs, what is the advantage of holding these - apart from the possible avoidance of Capital Gains Tax (CGT)?

A Stocks and Shares ISA may hold shares (equities), gilts, bonds, etc directly, but not all ISA Managers offer this facility – some will offer only collective funds within their Stocks & Shares ISA. Whether an investor chooses direct investments or collective investments within his ISA is a matter of choice depending on his attitude to risk.

Holding investments within a Stocks and Shares ISA means that any interest received from corporate bonds, gilts or corporate bond funds is not subject to income tax deduction and any capital gain is not subject to CGT.

Bearing in mind that this type of investment should always be regarded as long term (5 years or more), and that an ISA investor who has subscribed since ISAs launched could have put in over £80,000, it is perfectly possible that at some point he could be looking at a capital gain in excess of the current limit (£10,100).

16: What types of investments can be made within an ISA?

Within a Stocks and Shares ISA there are a wide variety of types of investment that can be held provided they meet certain criteria laid down in the ISA Regulations.

Where an ISA Manager offers a particular fund or investment within an ISA wrapper, the investor can assume that the investment is ISA qualifying. It is the ISA Manager’s responsibility to ensure that all investments held within ISAs that he manages meet the requirements of the ISA Regulations.

Read our blog which answers more specific ISA questions.

All rates correct as of 12/03/10. 

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