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Financial Planning - ISAs
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Over the last few years we have seen how important obtaining independent financial advice can be. With the downturn in the global economy and interest rates at an all time low, people are seeking advice more than ever before, in order to obtain the best rates of growth on their pensions and investments.
Gone are the days where you can "invest for life". Making an initial investment and then leaving the funds to weather the ups and downs in the market is not advised. Regular reviews to ensure that the investments continue to match both your investment risk profile and ever changing personal requirements are important. We would suggest that this is done at least once a year.
The finance industry has changed over the last few years and more changes are coming over the next couple of years, therefore choosing the right firm to obtain advice from is essential. We have already seen one of the major banks earlier this year announce their withdrawal from personal financial advice and we expect others to follow suit.
Obtaining advice from an independent firm on a fee basis ensures you receive unbiased advice, suited to your own personal needs
and circumstances.
Individual Savings Accounts
So, for our first topic we will look at ISAs. We are at that time of year when people are now beginning to think about adding to an existing ISA for this tax year or perhaps looking at an ISA for the first time. So what is an ISA?
An ISA is an Individual Savings Account, introduced in April 1999 and replaced PEPs and TESSAs. Essentially, an ISA is a tax efficient wrapper into which you can put either cash or stocks and shares. Many people fear them as a complex investment but this is not the case.
If you have any savings or investments, you should have an ISA. By saving the potential tax, you increase your returns, it's that simple.
There are two types: a cash ISA and a stocks and shares ISA.
Cash ISA
A cash ISA is basically a cash deposit account, free from any risk. As with any deposit accounts there are different types: instant access, fixed rate, notice accounts and accounts with base rate guarantees. Each year you are allowed to set aside up to a specified amount in cash completely tax free. For 2011/12 the amount is £5,340.
For a basic rate taxpayer you will save 20% of the interest that you would otherwise give to the taxman and for higher rate taxpayers this would be 40%, and up to 50% for 'additional rate' taxpayers.
Stocks and Shares ISA
For the 2011/12 tax year you are able to invest up to £10,680 into a stocks and shares ISA. Clearly these hold more risk than a cash based ISA, however the risk can range from minimal to high risk, depending on your individual requirements for your investment. Obtaining independent financial advice is essential for these investments to ensure that the risk of the funds selected is matched to your own personal needs and capacity for risk.
For shares in individual companies you can choose a "self-select ISA" and often these are managed by a stockbroker and can form part of a larger portfolio of investments.
For the majority of investors, you may consider investing your annual allowance into a collective investment such as a unit trust or investment trust. These are pooled investments where a fund manager picks a selection of shares based on geographic or sector criteria and the value of the investment depends on the collective performance of the shares picked.
Placing these investments inside an ISA wrapper provides two tax advantages. First any profits made from share price increases aren't eligible for capital gains tax and second it enables all the tax on bonds to be reclaimed.
How much can I invest?
The current limit is £10,680, up to £5,340 of which can be in the form of cash.
There are basically three ways in which you can use your allowance:
1. Using your whole cash allowance of £5,340 (2011/12) leaving the remaining £5,340 to invest in shares if you wish.
2. Using your whole allowance of £10,680 (2011/12) for shares, however you will not be able to utilise your cash allowance in the same tax year.
3. Mix and match: Use any amount up to the £5,340 in cash with the remainder into shares. For example, if you chose to put £2,000 into a cash ISA, this would leave the remaining £8,680 available for shares.
Each year, on 6th April, a new ISA allowance is given so any investment must be made before 5th April each year to secure that tax year's allowance. Unused allowance cannot be rolled over and will be lost.
However, once invested and left, the ISA will continue to benefit from the tax free environment year on year. Should you withdraw the amount, you will not be able to reinvest again under the tax free ISA rules, so you need to ensure that any withdrawals made are essential, and from the most effective environment.
Getting the best returns!
Like anything, getting advice or shopping around is essential. Once invested into an ISA, you do not have to remain with the same provider for life. However, as stated above, once you encash your ISA you will lose that year's allowance as you cannot reinvest in the same tax year.
However, you can move your existing or previous years' ISA from one provider to another, known as an ISA transfer. (Not all providers will accept transfers). If moving your cash ISA, you should speak to your new provider who will complete an ISA transfer form for you and look after the process. DO NOT WITHDRAW THE MONEY YOURSELF FROM YOUR EXISITING ISA.
For a stocks and shares ISA, your financial adviser will take care of the transfer process; however a charge may apply when making the new investment.
For more advice or to discuss your own personal requirements, please contact Alexander Price on 01202 840900 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it and we will be happy to discuss your needs.
Please see our website for more information.
