Individual Savings Accounts have been hugely popular since their
introduction at the turn of the century. While millions of savers
have been happily storing away nest eggs completely tax free,
others have found ISAs a little confusing. Together with www.debts.org, we
explain what ISAs are, how they work and why ISAs are suitable for
all kinds of savers.
What are ISA Accounts?
ISA stands for Individual Savings Accounts - saving schemes
which allow people to save without being taxed on earnings. ISAs
were introduced by the government in 1999 and have proved immensely
popular with savers. In a bid to make ISAs appealing to everyone,
the government is simplifying ISAs with reforms scheduled for
April.
What kind of ISAs are available?
ISAs vary in detail depending on your provider,
i.e. bank, building society or stockbroker, but there are three
general categories:
1) Cash
ISAs,
2)
Maxi ISAs.
3)
Mini ISAs
In April 2008 - the end of the financial year - mini and maxi
ISAs are to be replaced by stocks & shares ISAs.
Under the reforms, every adult will be limited to an investment
of £7,200. Of the £7,200 limit, £3,600 can be saved in a cash ISA
with one provider. The remainder of the £7,200 can be saved in
stocks & shares with the same provider or elsewhere. The other
good news is people who want to save more than £4,000 will no
longer be tied to one provider, as was formerly the case.
Investing in stocks & shares
does have an element of risk and therefore a return on savings is
not guaranteed.
For more information visit
www.debts.org/isa_accounts
Can anyone open an ISA account?
ISAs are used by approximately 17 million people and are open to
almost everybody.
However, there are some exceptions:
1) Under 18s are not
allowed to invest in stocks & shares - but can invest in a cash
ISA.
2) Young people under the
age of 16 are not eligible for their own ISA - although there are
other saving schemes available. See www.debts.org/savings_accounts
for more details.
3) People who work for the
courts or overseas military personnel are not eligible for ISAs
4) Non-residents cannot
open an ISA account of any kind.
Can I get instant access to my savings?
Some cash ISA do offer instant access to your savings but before
you make a withdrawal check the terms and conditions. Like other
savings accounts, early, excessive or multiple withdrawals can
incur penalties. Other cash ISAs will require a notice period
before you can pocket your savings.
Is there a limit to how much tax I save?
The amount of tax saved through an ISA scheme will depend on
your income tax bracket. People who pay 22% income tax, for
example, will save the same amount with an ISA. In most other
savings regimes you are taxed on earnings at the same rate as
income tax.
Do I need an ISA manager?
Unless you have a sound knowledge of ISAs and the various types
currently available, you should consult an ISA manager. Wherever
you apply for an ISA, through a bank, building society, insurance
broker etc there will be an ISA manager to offer guidance. Your ISA
manager is responsible for selling you the right savings product
based on the following criteria:
1) How much you want to invest
2) Where you want to invest it, e.g. in cash or stocks
& shares
3) Whether or not you need instant access to funds
Your ISA manager will also handle all ISA investments.
What is an Index Tracker?
An ISA index tracker is a system which enables you to monitor
shares prices. The trackers compare the various stock markets on an
ongoing basis which means you have the potential to capitalise on
rising stocks. In theory, it gives you more control over your
investments and helps you avoid any dip in share prices by keeping
up to speed with the very latest market results.
What do Index Trackers do?
Trackers gauge the performance of an index and either:
1) Purchase shares in all
companies across a shares index; or
2) Buy shares in certain
companies on the index
A tracker comprehensively analyses movements across all indexes,
i.e. FTSE 100, FTSE 250, Dow Jones etc and empowers the saver to
make an informed investment decision.
Why should I use an index tracker?
Using a ISA fund manager to monitor the stock market can
be expensive because of the intensity of the labor costs. An index
tracker, however, does not need the same level of resources and
therefore significantly reduces costs. A tracker also keeps up to
speed with market developments whereas a fund manager may be less
vigilant.
Why should I not use an index tracker?
The strength of an index trackers lies in its ability to keep up
with the latest market developments. What a tracker cannot do,
however, is make market predictions. Making market predictions is
the job of a fund manager. A good ISA fund manager will be able to
make short-term forecasts based on market information and move
investments to avoid any losses. Likewise, a fund manager can move
investments to capitalise on performing companies.
For more information on Index Trackers visit
www.debts.org/accounts/isa_accounts
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