Are You Missing out on ISA Savings?

By: Nektaria Stamouli
25-Mar-2010

The tax year end is approaching and if you are considering which is the best way to save some money and invest at the same time, an Individual Savings Account (ISA) may be the answer. Investing in the stock market may seem intimidating, but an ISA is simply a tax-free wrapper into which you can place either cash or stocks and shares.

The main benefits of an ISA are the fact that you don't pay any personal tax (income or capital gains) on any investments, you don't need to include the income and gains from ISAs on your tax returns and you can take money out of your ISA at any time without losing your tax benefits.
ISAs were launched in April 1999 by the Government, to help the value of your money grow over time and/or provide an income. They enable tax-efficient investments and savings to be made in two main areas; cash and equities.

April 5th 2010 is the deadline for individuals to contribute up to their annual limit (3,600 GBP for each of cash ISAs equity ISAs, or a total of 7,200 GBP for equity ISAs) for this tax year. Savers aged 50 and over have had a head- start on the increased ISA limits, which allow a total of 10,200 GBP to be saved (of which 5,100 GBP can be held in cash. And from April 6th the allowances are increasing for everyone in the new tax year pounds to 10,200 GBP. So now is the time to take advantage of tax-efficient savings and ensure you are not gifting away money to the taxman.

Many people get confused, thinking of an ISA as a complex financial product, and are discouraged from making use of their allowance. In fact, Britons are set to waste a huge 35 million GBP in tax this year by not putting their savings and investments in a tax efficient savings account such as an ISA.
According to a research by unbiased.co.uk, only one in ten consumers said the increase to ISA limits will definitely save them money. Even more worryingly, two in five consumers do not think these new limits will cause them to improve their savings habits.

Unbiased.co.uk reveals that 5.9 million adults have a savings or deposit account, but no ISA. The Office for National Statistics says that over 4 million of these savers are estimated to have deposited an average of 1,787 GBP each into these accounts during the past year. If just 1.500 GBP of this had instead been invested into cash ISA returning 0.41%, then the average saving in tax would be 1.72 GBP per investor. Therefore by adults failing to save tax efficient ISAs a total of 15 million pounds has been lost overall in error waste.

Furthermore, if the 1.5 million holders of shares outside ISAs took the decision to transfer an average of 4,000 GBP of their holdings into an equity ISA, the tax saving generated would be 13 GBP per individual. This is equivalent to 20 million GBP in avoidable waste. In total, not taking advantage of the tax breaks available through both cash and equity ISAs costs Britons 35 million GBP in unnecessary tax payments.

Taking into consideration that experts report that interest rates could remain very low for the foreseeable future, it is more crucial than ever for consumers to make sure their savings are working hard for them. But first of all you should take into consideration your personal needs.
ISAs are designed to meet different demands, so some are better for short term saving, while others favor long term investments. Cash ISAs are more appropriate for short-term savings, allowing you to access your money easily, with a variety of accounts available including easy access, fixed-rate and notice accounts.

Stocks and shares ISAs on the other hand, may be best if you can afford to leave your money untouched for around five years or more. However, you should bear in mind that your investment can drop in value as well as increase, and profits are not guaranteed.

All high street banks offer ISAs as well as some building societies, National Savings and investment trust and even supermarkets and retailers. You can compare ISAs online to help you find the best rates and a deal to suit your needs.  As another avenue for research, your bank's ISA manager will be able to tell you about the ISAs it offers, and which type of ISA might be best for you. However, they might not offer the best rate, so it pays to shop around. Alternatively, you could go to an independent financial adviser for help in choosing the best option.

However, only a few days are remaining to invest your money in ISAs for this tax year. However, if you're unsure, don't rush just to make a decision, as there is always a risk in investing your money.  There is plenty of time to take advantage of the higher ISA allowance in the next tax year.