Government Business - Planning for the future

Planning for the future

Financial planning might not be at the top of your ‘to do’ list, but investing a little thought now could reap dividends for you in the future says Samantha Mitchell, director of the British Bankers’ Association

If you’re in the lucky position of having a few pounds left over at the end of each month, you’re a UK resident and a taxpayer it might be worth taking a look at what an Individual Savings Account (ISA) can offer. As well as being a first step into regular savings, it can offer the more experienced saver who is willing to accept a degree of risk an entry into the stock market.

Because of the advantageous tax arrangements, ISAs, which were introduced on 6 April 1999, have proved popular with investors. There are currently two different types, known respectively as a ‘mini’ ISA and a ‘maxi’ ISA although this distinction is due to be simplified in 2008. Investment can be made up of cash, or stocks and shares. You need to be 18 or over to invest in the stocks and shares component, but you can invest in a cash ISA if you are 16 or over.

Neither income tax nor capital gains tax is payable on your investment and the government has guaranteed that interest on ISAs will be tax free at least until 2010. You can take your money out at any time, although with some types of account you’ll need to give notice before withdrawing funds and you may find that that you won’t be able to benefit fully from the tax concessions available to you.

Understanding your investment
Not surprisingly, any tax-saving vehicle, particularly one with such attractive features, is bound to have some restrictions. These aren’t onerous but they are important. The income from your investment could be affected, so it’s important that you understand what those restrictions are and how they could affect your investment decision. Everyone’s circumstances will be different and if you are in any doubt about whether an ISA is suitable for you, you should seek guidance from a professional financial adviser.

Both mini ISAs and maxi ISAs allow you to invest cash and stocks and shares, but they operate in distinctly different ways. With the mini ISA, your investment is neatly separated, with the account being used purely for the investment component you have chosen. In other words, a mini ISA can be used for investing either cash OR stocks and shares. A maxi ISA, on the other hand, allows you to hold both these components in the same account; think of a maxi ISA as a “wrapper” if you like. Current rules do not allow you to invest in both a mini ISA and a maxi ISA in the same tax year.

Each tax year you can invest either in one ‘maxi’ ISA, or up to two ‘mini’ ISAs – one for cash, one for stocks and shares. You cannot invest in more than one mini cash ISA in the same tax year and there are strict limits to the amount and type of investment that you can make. Once you have reached this limit, you will not be able to invest any more in the ISA during that tax year, even if you withdraw funds during that period.

The maximum amount you can invest in a mini cash ISA each tax year (6 April to 5 April) is £3,000. In addition to a cash ISA you can invest £4,000 in a mini stocks and shares ISA. If you decide to open a maxi ISA you can invest a maximum of £7,000 in it each tax year, but of this, only £3,000 can be in cash.

Naturally, the choice of investment components and the type of ISA to open is up to the individual concerned, but as a general rule, a cash ISA is more suited to shorter term saving, because your money is more easily accessible should you need to do so. A stocks and shares ISA is more suited to the higher rate taxpayer looking for medium to long term savings. As with any investment in the stock market it also carries the risk that the value of your underlying investment may go down as well as up.

Shop around
Different providers will have different terms and conditions for the ISAs they offer. You will find that interest rates differ too, so it will pay to shop around and to choose an account that suits your own particular needs. Some accounts will enable you to make regular payments into your ISA account and others will allow you a free choice in the frequency that you make payments. Providing you don’t exceed the total allowable annual amount, you can pay into an ISA as frequently (or infrequently) as you wish. However, if the period between payments is more than a tax year, you will need to complete a new application form when you resume payments into the account.

You can open an ISA through ISA fund managers such as banks, building societies, National Savings and Investments and financial advisers. All ISA managers, must be authorised by the Financial Services Authority (FSA) and approved by HM Revenue & Customs. To find out if an ISA manager is authorised by the FSA phone their Consumer Helpline on 0845 606 1234, or check online at www.fsa.gov.uk/consumer/fcs/index.html

Approval does not mean that the ISA manager’s performance is guaranteed, or that the investment will produce a satisfactory return. The value of the underlying investment in a stocks and shares ISA could of course go down during the investment period.

Getting started
To open an account you will need to provide your name, address, date of birth, National Insurance number and signature. You will also have to provide proof of identity and your address if you are not a customer already.

Because ISAs are designed to provide individuals with tax relief on their savings, they are only available to individuals, so you won’t be able to open an account in joint names or on behalf of someone else. There’s nothing stopping a husband and wife from each opening an account in their individual name though.

If you decide that you would like to transfer your ISA to another provider, you can do so, but check the terms and conditions with your ISA manager to find out if you will be charged for transferring the account.

You will need to arrange the transfer through your existing ISA manager. Because of rules regarding the continuity of the account, and to retain the tax-free status, the transfer must be made directly between the two institutions involved, so you won’t be able to arrange a transfer yourself by closing the first ISA and paying the money to another ISA manager.

If you move abroad and cease to be a UK resident for tax purposes after you have opened an ISA, you will not be able to put any more money into the account, but if you keep your account open, you will still be entitled to the tax benefits on investments held in the ISA.

For more information
You can find out more about ISAs from the individual providers: