Sometimes it’s worth going back to basics. When you work in finance every day, it can be easy to assume that people know certain fundamental things about how to manage their money. And then, every now and then there’s a reminder that this assumption is, of course, not true. So today we’re tackling ISAs.
What is an ISA?
ISA stands for individual savings account. But there was a bit of an overhaul in July 2014 following this year’s budget, so you might now hear about NISAs. Can you guess what that stands for? Well, it’s new individual savings account.
You can pay up to £15,000 each year into a NISA. And under the new rules, this can be as a mixture of cash and stocks and shares.
You can either have a separate stocks and shares NISA and a cash NISA or you can pop the whole lot in the same account. As long as you don’t exceed the £15,000 per year threshold, the split it up to you.
There are a range of NISAs available. Some offer easy access with slightly lower interest rates. Others have fixed, higher rates but may have restrictions on how long you have to leave your investment in the account before you can access it again. Make sure you check all the details before selecting your NISA.
So why should you have a NISA?
Any cash you hold in a NISA is entirely tax free. Yes, you heard. You get to keep all the interest you earn. Do you need a better reason?
A cash NISA should be the first place you put any savings. They’re easy to set up, simple to use and you don’t pay tax. Winner.
The rules are slightly more complicated for stocks and shares in a NISA, but it’s still a tax efficient way of saving. There’s no tax on profits (capital gains tax), no tax on interest earned on bonds and a 10% tax cap on income from any shares investments – a huge coup for higher rate tax payers.
Stocks and shares NISAs are typically managed by an online service or fund management group. They may charge a fee for you to open the account, withdraw your money or move it, so it is worth bearing that in mind.
How to make the most of your NISA
1) Use as much of your annual allowance as you can afford to. If you don’t use it, you lose it.
2) Shop around for the best rates. It is possible to transfer your ISA so, in the same way as you should review rates on your current account or mortgage, review what you’re getting in your NISA. What you can do with your investment and the best way to do it will depend on your account, whether your current savings are cash or stocks and shares and how long they’ve been in there.
But our number one tip: NEVER withdraw all the money from your NISA yourself to move it – it must be transferred properly or you’ll lose your tax benefits.
3) Think about the stocks you put in your NISA. If your stocks in your NISA go down, you basically have to write off your losses. So focus on slightly safer bets. You might make less, but you’ll also minimise your risk of making a loss.
So that is a bit of a whistle-stop tour of ISAs/NISAs but should at least serve to remind you that the simple solution can sometimes be the best, at least as a starter.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
GreenSky Wealth Ltd is an appointed representative of Financial Limited which is authorised and regulated by the Financial Conduct Authority. FCA No: 516410
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