With ISA season well under way and the end of the tax year in sight, it’s time to make good use of your ISA allowance if you haven’t done so already. You’ve only got until midnight on 5th April 2014 to squirrel away up to £11,520 of your hard-earned cash and protect it from the tax man, so there is no time to waste. The period between now and the end of the current tax year is an important time for both savers and investors so to help you make the most of your ISA allowance, we’ve put together our Top 10 tips for the 2014 ISA season.
Tip 1 – Don’t miss deadlines
Before you do anything else ISA-related, make sure you know all the relevant deadlines. The main deadline to remember is 5th April since this marks the end of the tax year and is the latest date for using your ISA allowance within the current tax year (2013/14). Remember that you cannot backdate your 2013/14 ISA allowance once this deadline has passed – if you don’t use it, you lose it.
Also look out for other deadlines which may apply. Many ISA providers will need your application – and possibly your cleared funds – before this date. Additionally, some ISA plans have an earlier deadline for ISA transfers whilst some offer limited funding and may close early if they become oversubscribed.
Tip 2 – Maximise your ISA allowance
Your total ISA allowance for 2013/14 is £11,520. You can put the entire allowance into an Investment ISA (stocks and shares ISA), or you can put up to £5,760 in a Cash ISA. If you decide to use some or all of this Cash ISA allowance, you can also put any remaining balance into an Investment ISA.
Also remember that these allowances are per person, so a couple can invest up to £23,040 in total this tax year and when the ISA allowance changes to £11,880 from 6th April 2014 (the 2014/15 tax year ISA allowance), this increases to £23,760.
Tip 3 – Understand what using your ISA can achieve
In the current financial climate ever penny counts – so why pay tax on money that you can protect from the tax man? If you had invested the maximum into a Cash ISA since the turn of the millennium and it had grown at 5% per year, you would have a pot approaching £80,000 whilst putting the maximum into an Investment ISA that had grown at 7% each year would see a lump sum of over £195,000. These are sizeable amounts, none of which would be subject to income tax or capital gains tax. Please note that the tax efficiency of ISAs is based on current tax law which is subject to change in the future.
Tip 4 – Check your current interest rate
It’s not in your ISA provider’s best interests to offer you the best deal year after year as this is not where they make their money, and don’t rely on them making sure you are aware that your rate has gone down or that a better rate is available because it won’t happen, even if it is available from the same provider. Banks don’t want your money at the moment and interest rates have been in steady decline, especially for existing customers.
Always check the rate that you get on your current ISA which should be detailed on each statement they send you. Rates change frequently and once you’ve deposited your hard earned cash, your ISA provider knows from experience that you’re unlikely to get round to switching providers even if your rate ceases to be competitive. Don’t be that person! Always check the rate you’re currently receiving and compare it with a wide range of other options on offer.
Tip 5 – Review those introductory rates
You should also be on the lookout for any introductory rates that may have come to an end – that headline rate may have been a good deal and looked appealing at the time but it is important to check that the standard rate you receive is competitive too. ISA providers know from experience that most savers will drag their feet when it comes to reviewing their options and switching to a better rate. However good your ISA deal seems at the outset, it’s likely that you’ll need to transfer your ISA fairly frequently in order for it to remain competitive.
Tip 6 – Think carefully about timescales
Historically, fixed-rate Cash ISAs tended to offer higher interest rates than instant access Cash ISAs. However, the current low interest rate environment means that the uplift available in return for locking up your cash is barely worth your while. This means that those with fixed rates or introductory rates coming to an end are likely to be facing a significant drop in the level of interest they receive, even for those who do not require immediate access to their capital.
If you are able to tie up your Cash ISA savings for at least 3 years but can’t find a fixed-rate deal that’s currently competitive, you may also like to consider the wide range of structured deposits available. These plans combine capital protection with the potential for higher returns than are generally available from instant access or fixed-rate Cash ISAs.
Investment ISAs should generally be considered as a longer term option, with most requiring a minimum commitment of five years in order to offer competitive returns. In additional to funds, there is a wide variety of both growth and income investment plans, all of which offer a defined return for a defined level of risk.
Tip 7 – Maintain your ISA at all costs
Whilst your savings and investments remain in their tax-efficient ISA ‘wrapper’, the benefits become more and more valuable over time as the compound effect of not paying tax each year builds and builds. This is why not only should you try and maximise your ISA allowance each year, but you should also aim to make sure your ISA is the last money you dip into since as soon as you take money out of your ISA it loses these benefits and starts to become subject to tax.
Tip 8 – Don’t forget the transfer option
You can transfer all previous ISA holdings, whether they are in a Cash ISA or an Investment ISA. This means that you can keep all of your ISA savings and/or your investments in one place, reducing the amount of time you need to spend reviewing your options. With low interest rates, many are considering transferring Cash ISAs into Investment ISAs as they face the impact of low savings rates. The upside here is the potential for higher returns while the downside is that such returns are not guaranteed and your capital is put at risk. You should also note that once you have transferred you cannot switch back to Cash ISA in the future.
The ISA transfer process is pretty simple, but not necessarily intuitive. It may seem that the logical way to transfer your ISA would be to take your money out of one account and put it into another. Unfortunately, if you do this you will lose all of the tax benefits. You should never just withdraw the money if you want to transfer – instead, speak to us here at Fair Investment who will help you through the transfer process. Please also check with your existing ISA provider whether any charges apply on transferring.
Tip 9 – Get ahead of the game
Even better is to sort out the following year’s allowance now, and here’s why. If you invest £10,000 and receive 5% growth but you only invest right at the end of the tax year, the effect of the beneficial tax treatment is minimal. However, if you had invested at the start of the tax year, the removal of the 20% tax on your interest would have added another £100 – for doing nothing other than being well organised.
The Cash and Investment ISA allowances will increase to £5,940 and £11,880 respectively from 6th April 2014 and many Cash and Investment ISA providers make it easy to contribute both this year’s and next year’s ISA allowance. So start as you mean to go on and get organised right at the start of the new tax year – this means one less thing to worry about as well as up to an entire year of extra tax-efficient returns.
Tip 10 – Review ALL of the options available
The range of ISA options to choose from is vast and growing day by day in the run up to the end of the tax year. As the market develops, new opportunities arise and with pressure on interest rates and the diminishing returns on fixed rate bonds, these should be considered carefully.
This time of year brings a high level of competition from providers looking to persuade you theirs is the best option for your hard earned money. Fair Investment provides opportunities across both Cash ISAs and Investment ISAs and our wide range of options is constantly being updated to reflect a selection of the best the market has to offer.
Compare our latest Cash ISA selections >>
Compare our latest Investment ISA selection >>
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment depends on your individual circumstances and may change and may be subject to change in the future.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.
Structured investment plans are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index or any shares listed within the Index is not a guide to their future performance.
