5 reasons to take out an ISA
On April 6th 2013 the new tax year begins, and another year of saving in an ISA starts. If you have been lucky enough to hit your Individual Savings Account (ISA) limit for this year, then you can start again from this date. However if you’ve not hit your limit you should be looking to save as much as you possibly can before the end of the tax year, as anything you don’t save this year will effectively limit what you can save in the coming year.
What about those who don’t have an ISA though? Are they missing a trick? Here are 5 good reasons why opening an ISA (and doing so before the end of the tax year) is a good idea.
1. They’re tax free
You can beat the taxman by opening an ISA. Your money is placed in a tax-free environment. Imagine tax as rain. If you stand out in a storm you are going to get wet. However an ISA represents an umbrella, whereby once opened prevents the rain from touching you, and you are kept dry.
The advantages of this over a normal bank account are simple. In an ISA you don’t pay any tax on any dividends paid by the fund. Any profit is also free from capital gains tax, so your savings can go much further.
2. The allowance is going up
This happens annually to keep the allowance in line with inflation, and that is a massive positive when it comes to making sure your money is worth the same in 20 years as it is now. Other financial products, such as some pension annuities for example, have not kept up with inflation, meaning those who have saved using one of these pension schemes will lose out in the long run.
It is also vital that you use your whole allowance as soon as you can too. The earlier you save, the more interest you will earn on your money, and obviously the more you save will also boost the interest.
The 2012-2013 ISA limits are:
Cash - £5,640
Stocks and Shares - £11,280
The 2013-2014 ISA limits are:
Cash - £5,760
Stocks and Shares - £11,520
3. Affordable saving
Saving in an ISA is as affordable as you want to make it. A wide range of cash ISA’s will allow you to open with an initial deposit as little as £1. On the other hand ISA’s can be opened for free if you commit to paying a monthly premium, which can range anywhere from £10 all the way up to £960 per month. This means that no matter what your financial situation is, you should be able to contribute to an ISA.
4. They’re extremely flexible
If you’re scared of commitment then ISA’s may seem daunting to you. However, contrary to popular belief, you don’t just feed money into an ISA and not see it again for 10 years. In fact the trick to getting the best interest rates, and earning the most money from you ISA, is to constantly be on the lookout for the best deals.
If you leave your money in one place then you will almost certainly lose out, because there are always introductory interest rates for news customers with other providers. It’s a bit like car insurance in a way, in that switching providers will probably get you a better deal. However stocks and shares ISA’s are better left alone, even if you do lose money at some point. Simply wait it out and the fund is likely recover, getting you back in the black.
Also flexible is your financial commitment to an ISA. You can vary your premiums and lump sum commitments at will to suit your financial situation.
5. You can spread the risk
This is another great thing about ISA’s. There are two types of ISA – cash, and stocks and shares. Cash ISA’s have a set interest rate and, because your money is invested in cash, are very low risk. You know that you are not going to lose money on your investment, and will also be able to calculate exactly what you will get back.
On the other hand, stocks and shares ISA’s are more unpredictable. Your money is strategically invested into companies by the fund manager working for your provider. The amount of interest you earn from your money will depend entirely on how the companies invested in by the fund perform. You have the scope to earn higher rates of interest than cash ISA, but also the chance that the worth of your money could decrease.
However you can spread the risk between both types of ISA, by taking out one of each and combining the two. This is also a good idea if you have long term saving goals, but feel like you might need access to some of the money. It would be strongly advised that you take deposits from the cash ISA, and leave the stocks and shares ISA untouched for as long as possible. If you have two funds and only one that you access to draw deposits from, you will probably find yourself withdrawing less than if you had a much larger sum in front of you in one fund. In turn this helps to maximise your savings.
If you have any questions about saving into an ISA or Junior ISA please contact one of our advisors who will be happy to help
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