The ISA season is upon us again and bank and building societies are urging us to deposit our hard earned cash with them before the end of the tax year. So here’s a real idiots guide to help you decide whether you need one and, if you do, which type is better for you.
An ISA is an Individual Savings Account and this year you can invest up to £15,000. Your money can be held in a ‘cash’ ISA which, as it sounds, is a simple deposit account and from which you can withdraw your money whenever you like. There are no limits – you don’t need to keep it for 2 years or 5 years of even `10 years as lots of people seem to think. The only exception to this would be where you agree a fixed rate of interest for a fixed term, that way you may suffer some loss of interest if you withdraw your savings before the end of the fixed rate period, much like fixed-rate mortgages.
As an alternative to cash you can have a Stocks and Shares ISA and here your money will be invested in a mix of shares, either directly or via some sort of ‘basket of funds’. The choice is almost endless, and each comes with a different amount of risk and a different charging structure so you need to ask questions about both of these things before you write a cheque. As with cash ISAs, you can withdraw your money from a Stocks and Shares ISA whenever you like. But you do need to be aware that sudden movements in the shares in which your ISA is invested could mean that your investment has fallen in value, often dramatically. So only use Stocks and Shares ISAs if you are investing money that you don’t need for a while, and by a while I mean five years or so rather than a couple of months.
Any money you make while your money is invested in an ISA is tax free and doesn’t need to be mentioned on your tax return if you complete one. So it should be the first port of call for up to £15,000 that you have on deposit at the moment if you don’t have one. And remember that you get a new allowance that you can use again from the 6th of April when the new tax year starts.