To ISAs or not to ISA

What is an ISA?

The dictionary term is: – “an Individual Savings Account (ISA) allows individuals to hold cash, shares and/or unit trusts tax-free on dividends, interest and capital gains.

What does this mean?

Each tax year the Government ‘generously’ gives us a tax-free allowance on savings held within an ISA.

In July 2014, the Government increased this allowance to £15,000.  The Government has already announced the new ISA allowance the coming 2015/16-tax year of  £15,240.

Growth or income from ISAs is tax-free.  You don’t even need to declare the income you receive on your tax return.

provided you have not exceeded your allowance for the tax year.

What’s the difference between the different types of ISAs?

There are two types:

CASH ISA

A Cash ISA works pretty much the same as any other savings accounts except the interest earnt is tax-free.

This type of ISA is great for someone that wants to be tax efficient, but may need access to the cash to cover unexpected bills.  Within a Cash ISA your cash remains as cash and can therefore be removed at any time.  You can add to your ISA but only up to the £15,000 withdrawn

The downside to Cash ISAs is that interest rates are still very low.  Cash is an inefficient way to save for long term goals.

STOCKS & SHARES ISA

A Stocks and Shares ISA invests your money in other equities such as Gilts and Bonds to Unit Trusts and Investment Trusts and OEICS a range of stocks and shares from government stocks and bonds to unit trust and holdings in blue-chip companies.  It can also hold cash much the same as a Cash ISA.

Compared to a Cash ISA, a Stocks and Shares ISA has a higher potential return but with it comes a greater risk and cash may not be instantly available.  The value may experience fluctuations in accordance with the market.

A Equity ISA should be considered as a long-term investment (3-5 years) rather than a short-term cash holding.  Most often, this suites people with a little more cash spare or people looking at longer term savings or goals, as their ISA allows them to invest tax-free in the long-term, but still leaves them with liquid assets available in case of an emergency.

Who can open an ISA?

ISAs are open to UK residents only (Crown Employees).  Cash ISAs can be opened from the age of 16 with Stocks and Shares ISAs from 18.  

There are special Junior ISAs available with some extra rules, if you would like more information about Junior ISAs, please contact us.

It’s important to note that ISAs can only be opened in an individual’s name.  They cannot be opened jointly which means that a couple can have two ISA allowances each year.

ISA Golden Rules

1.              You can only open one ‘new’ ISA of each type each year.

2.              You have one allowance per tax year, per person.  You can choose to place this all in a Cash ISA or all in a Stocks and Shares ISA or you can opt to mix and match and spilt your allowance between a Cash ISA or a Stocks and Shares ISA.

3.              If you fail to use your ISA allowance before the end of the tax year it cannot be rolled over so once it’s gone it’s gone.

4.              If you want to switch providers for any reason, no problem, just remember do not remove or disinvest yourself.  Once it has been removed from it’s ISA ‘wrapping’ anything that was within it looses its tax-free status.  Your new provider will do the transfer for you, which retains the ISA status and does not effect this years’ allowance.

Should you wish to discuss ISAs or any other element of your financial planning needs, please call us on 01636 870 069.

Inflation: Are we looking at goods times or more bad times?

With inflation sitting at it’s lowest in a decade and half (1.5% below the Bank of England’s target of 2%) and now finally below wage increases; are we set to see an end to the longest economic squeeze since Victorian times?  Lets examine the evidence:

We are already seeing a significant fall in oil prices, now approaching their lowest since records began in 1989, and in all likelihood inflation will probably follow.  Capital Economics have suggested that the average household is set to benefit around £455 per year just in the fall of oil prices alone.

We are also likely to see a “tax cut” in other areas over the next coming months and with low inflation and rises in wages this means our pockets are going to be a little fuller than they have been over the last couple of years.

But low inflation and falling prices are only good in the short term.  Over the long term, Economists have concerns that we may see ‘bad inflation’ similar to that witnessed in the US in the 1930s when inflation continued to fall with wages following shortly afterwards.  This kind of ‘bad inflation’ last longer, has weaker growth and therefore takes longer for the economy to recover.

There are already concerns that this is already starting to evidence itself in Europe (not including the fall in oil prices), particularly in Greece.  In an attempt to prevent this, European Central Bank is set to begin quantitative easing in the coming months and with this carries risk and unpredictability.

So whilst in the short term we are expecting to see cheaper prices, increases to wages and an overall improvement in the standard of living, in the long term, however, things are still uncertain for the time being.