ISA’s – the basics – 2009/2010 tax year

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We get many enquiries asking about the different rules relating to ISA’s (Individual Savings Accounts) so I thought I would put together a quick article detailing the main points. There are many other articles on ISA’s elsewhere on shrewdcookie.com.

 

 

 

 

 

 

What is an ISA?

An ISA (Individual Savings Account) is a tax-efficient form of investment. It is tax-efficient in terms of there being no liability to income tax on any income received or capital gains tax on any gains you make.

An ISA will be included in calculating your Estate value for probate and inheritance tax purposes.

What different types of ISA are there?

There are two types of ISA:

1. Cash ISA – this is a savings/deposit account on which interest is paid tax-free.

2. Stocks and Shares ISA – this is an ISA which invests in a fund(s) which themselves invest in stocks and shares.

There are thousands of funds to choose from. Self-select ISA’s allow you to choose your own investment funds. An ISA through an IFA or other adviser can also be invested in if you are not happy to choose your own investment funds.

How much can I invest?

This depends on your age – if you’re going to be 50 or over before 5th April 2010 then you can invest:

1. Up to £10,200 in a Stocks and Shares ISA.
2. Of this £10,200 limit, up to £5,100 can be invested in a Cash ISA (with any unused allowance being available for a Stocks and Shares ISA). E.g. if you put £4,000 into a Cash ISA you can put £6,200 into a Stocks and Shares ISA.

If you’re aged below 50 then you can invest the following:

1. Up to £7,200 in a Stocks and Shares ISA.
2. Of this £7,200 limit, up to £3,600 can be invested in a Cash ISA (with any unused allowance being available for a Stocks and Shares ISA).

After 6th April 2010 everyone can invest up to the £10,200 limit.

Can I Transfer from one ISA provider to another?

Yes – approach the company to whom you wish to transfer to arrange this. Under no circumstances surrender the ISA – you will lose the tax-efficient benefits!

The ISA must be transferred between the providers.

If I transfer an “old” ISA does this use my current years ISA allowance?

No

Can a husband and wife have their own ISA’s?

Yes, everyone aged over 18 has there own personal ISA allowance.

If I take out a Cash ISA and a Stocks and Shares ISA do they have to be with the same provider?

No. You can have a Cash ISA with your bank or building society AND a Stocks and Shares ISA with a separate investment house.

Is there any risk involved?

Cash ISA – generally no – if the bank or building society were to go into “default” then you should be covered by the Financial Services Compensation Scheme (FSCS). In terms of returns, there is no volatility involved as this is purely a deposit/bank account.

Stocks and Shares ISA – these do carry risk – the level of risk will depend on the fund you invest in – some funds are riskier than others. With Stocks and Shares ISA’s you should ideally be investing for the medium to long term (minimum 5 years, preferably 10+). The value of the underlying shares can fall as well as rise, as has been seen over the last few years in the UK and world stock markets.

More information on the compensation schemes can be found at FSCS – please note you cannot claim on the FSCS if your plan falls in value!!!

If you have any comments or questions please let me know in the comments section below.

Remember though – we don’t give financial advice on this site!

Why a falling stock market isn’t always a bad thing!

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The one time when a falling stock market is NOT a good thing is when you want to take money out of the market in the near future – your portfolio can move horrendously against you within a matter of weeks if not days.

There is, however, a time when a falling stock market is a GOOD thing – that’s when you’re actually putting money into the market (as I have been doing over the last couple of years).

Now I’m not saying now is the right time for YOU to invest in the stock market – we all have our own reasons for investing (or not, as the case may be). My investment strategy, time horizons, attitude to investment risk etc will probably be different to almost everyone else’s so the actions I take may not be the actions which you should take!

The stock market performed a fantastic turnaround in 2009, with the FTSE100 rising from 4,434.20 at close of trading on 31st December 2008 to 5,412.9 at close of trading on 31st December 2009 – an increase in the FTSE100 of 22.1% during 2009.

Who knows where it will go next?!

Well, anyway, as part of my broader portfolio, I bought some shares in December in Tullow Oil (TLW.L) which is an oil drilling and exploration  company with interests in the African continent as well as other geographical areas. At the time I bought them, their shares stood at £12.99 per share. I had £1,000.00 to invest and therefore was able to purchase 76 shares back in December.

There has been a certain amount of volatility in the stock market recently and today I noticed that their share price had in fact dropped to £11.62 per share – a fall of £1.37 per share or 10.55% compared to what I paid for my shares back in December.

Now many people would be unhappy about this – not me! I saw it as a buying opportunity. I therefore decided to purchase another £1,000 worth this morning.

I am in this for the long run and will possibly hold these shares for in excess of 5-10 years so I took advantage of the recent fall in price to add more shares to my portfolio and benefit from pound cost averaging.

So what does all this mean? Well, I was able today to buy these shares at £1.37 per share less than I paid for them in December. I have drawn up a spreadsheet to demonstrate the benefit to me of this course of action.

 

 

I have included the dealing costs and stamp duty (0.5% on purchases) to take full account of the trading situation. You can see from row 1 that the total cost of my purchase of 76 shares in December was £1,007.28 giving a total acquisition cost per share of £13.25. Today I bought 86 shares at £11.63 and row 2 shows the total acquisition cost of £1,019.12 or £11.85 per share. So my purchase today cost me £1.40 per share less than in December.

Now here’s the interesting bit!!!

The second half of the spreadsheet answers the question “at what price per share do I have to sell to get my money back and break-even?”

Row 1 shows that had I not bought those shares today then to recoup the £1,007.28 outlaid in December, together with the £14.95 dealing charge to sell, I would need the Tullow Oil share price to hit £13.45 (last column) – this is the break-even price for my holding as it stood prior to today’s purchase.

Now consider the next row down – because I was able to reduce the average buying cost of my two lots of shares in Tullow down to £12.51 i have “pound cost averaged” down the cost of this holding in my portfolio.

The second row shows that to recover £2,026.40 (total cost of both the purchases in December and today) together with dealing charges of £19.95 (next tier of dealing charges) I would need to sell the shares for a minimum of £12.63 per share.

So in summary, had I only bought the December shares I would need Tullow Oil share price to hit £13.45 to break even.

Now with today’s “cheaper” shares I have reduced this break-even share price down to £12.63 per share – 82 pence per share lower. In effect, each and every penny that the Tullow Oil price rises over and above £12.63 is profit to me!

This therefore gives me scope for larger gains at a later date when I ultimately sell this holding.

If the price drops even further I will consider whether to invest further funds to reduce my break-even price even further.

Warning!

This is not a recommendation to buy shares in Tullow Oil or indeed that share ownership is suitable for YOU! The value of shares and the income from them can fall as well as rise and if the company went bust I could lose all my money. Do not act on this article without first taking suitable advice from a qualified stockbroker or financial adviser. You have been warned!!

Pre-Budget Report – 9th December 2009

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The Chancellor, Alistair Darling, will deliver his pre-Budget Report on Wednesday December 9th 2009.

One of the key questions facing the Chancellor, and indeed the Government, will be how to balance the books – ensuring there is enough money coming in to match the amount of money going out.

The country and business community wait with bated breath to hear what the Chancellor has in store.

There are concerns in the pensions industry that he could make further changes to personal pension taxation and in particular with reference to higher rate income tax relief.

If you are fortunate enough to fall in this category it might be a shrewd move to consider discussing any pension contribution planning with your financial adviser and, possibly, taking action to make any pension contribution ahead of the announcements on December 9th.

For a list of local Independent Financial Advisers visit IFA Promotion

Change in Personal Pension Retirement Age – Act NOW!

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I wrote in a previous article about the change in pension retirement age for personal pension plans from age 50 to 55.

When does the change come into effect?

This change comes into effect on 6th April 2010. You may need to take action before that date if you’re aged between 50 and 55 and wish to take pension benefits BEFORE you reach age 55.

Failure to act could mean that you are prevented from taking your pension benefits from your personal pension until you reach 55 – which could have a serious impact on any change in lifestyle you are planning on making in the next 5 years.

Newspaper article highlights opportunity to move t Income Drawdown

This article in the Daily Mail talks about this change in legislation maybe affecting up to 3 million people.

The article highlights the case of a gentleman who will be 50 on 5th April – the day before the change in retirement age comes into effect!

It mentions the option of moving to an “income drawdown” arrangement.

With an “income drawdown” arrangement your existing pension fund is moved into a new contract, tax-free cash (now known as “pension commencement lump sum”) of 25% of the fund value may be taken and the remaining pension fund remains invested and an income may be drawn from it.

This income is limited by the Government Actuaries Department and depends on a number of variables – a financial adviser can provide guidance on this should you decide to take your benefits through this route.

You don’t have to take income immediately from the income drawdown plan and most pension providers have flexible contracts.

You also have the opportunity to move from an income drawdown arrangement to an annuity at any time after commencement (known as vesting – see my article on maximising pension income in year one)

The one downside is that once you move into “income drawdown” the remaining pot will be subject to tax on death, whereas in the “prevested” personal pension plan, the fund might be held outside your Estate through a trust arrangement – you need to check with your specific pension provider to see if your personal pension with them benefits from this kind of trust arrangement.

Alternative Options

You could consider taking your pension benefits by purchasing an annuity. An annuity is an income for life – in exchange for your pension pot (after you have taken your tax-free cash – why wouldn’t you?!) the life company will provide you with an income for life.

This route offers lower risk – once the annuity commences the life office is carrying the risk that you die before the money runs out.

However, annuities are generally inflexible but do suit many people.

It is important to take advice before making any decision.

Alternatively, like most people, you could simply do nothing – many people are not in the fortunate position to be able to benefit from taking their pensions before age 55 – but that’s a topic for another day!

Action needed

If you will be aged 50 or over before the end of this tax year on 5th April 2009 AND you wish to take your pension benefits BEFORE age 55 that you contact an Independent Financial Adviser to ensure that you don’t miss out.

Act quickly as well – don’t leave it until the last minute – with postal strikes, increasing amounts of work in respect of ISA’s etc before tax year end and the generally slow speed at which pension funds move between companies you need to ensure that your IFA has a suitable time in which to understand your position, advise on the most appropriate course of action and to actually physically move the money into the new arrangement!

The whole process can take a few months – even longer depending on the pension provider.

Don’t Let the Postal Strikes Cost You Money

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Rob over at Moneywatch has some handy tips for us all to bear in mind with the possible postal strikes in the run up to Christmas.

His excellent article, “Don’t Let the Postal Strike Cost You Money” looks at various implications which we should all think about with the possibility of there being a disruption in the postal deliveries.

The Need to Plan Ahead

He talks about the need to plan ahead, particularly when it comes to paying your bills, credit cards and other important items.

WARNING! Get your tax return to HMRC as early as possible.

Actions I have Taken

For my part, I have tried to move away from dependency on the post over the last 12 months, not only to avoid problems with items getting lost or delayed, but also to do my bit for the environment.

1. Plan ahead – know what bills have to be paid and when.

2. I have moved all bank statements to paperless – I now simply download them once a month from my banks website.

3. If you have to post and it is important consider sending it by “special delivery” – although there is no guarantee that your letter will get through in the event of a strike atleast you’re covered for compensation if it gets lost in the post.

4. If posting ask yourself “could this be emailed or could I phone them instead”?

5. Pay bills by Direct Debit – not only is this less hassle and saves you the cost of a stamp but with some bills you can actually save money by setting up your payments by Direct Debit.

6. If you’re concerned about Christmas shopping not getting through, consider shopping online through a discount voucher site – many online retailers are promising that deliveries will not be affected by strike action – and if you’re really concerned why not get the present delivered direct to the recipient – many online stores will gift-box your purchase these days.

Let’s hope there isn’t too much disruption through any postal strike action – but check out Rob’s article and plan ahead.

Tax Return Deadline – A Reminder

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Hey folks – it’s that great time of year again when we all panic about getting our tax returns in to HMRC (those of us who complete a tax return that is).

Paper Returns

If you want to send a paper return to HMRC and have them calculate the tax then the deadline is 31st October 2009 (if you received a notice to submit a return before or on 31st July this year – if you received your notice after 31st July then you have 3 months from that date – confusing, I know!)

Online Returns

If you’re looking to have tax collected through your PAYE code (i.e. you’re an employee) then you have to submit online by 31st December 2009.

If you’re self-employed and you wish to calculate your own tax liability then you have until 31st January 2010 (this is the one I go for – note to self – get books to Accountant)

Summary

It’s important not to miss a deadline as HMRC may issue you with a fine of at least £100.

More information on tax deadlines from HMRC website.

WARNING – Malicious Email supposedly from HMRC

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I thought you should be made aware that I received a spam email today – purportedly from HMRC (Inland Revenue)

The body of the email contained the following text –

“Taxpayer ID: simon-XXXXXXXXXXXXXXUK
Tax Type: INCOME TAX

Issue: Unreported/Underreported Income (Fraud Application)

Please review your tax statement on HM Revenue and Customs (HMRC) website (click on the link below):

review tax statement for taxpayer id: simon-XXXXXXXXXXXXXXUK” 

Below the above text was a link to a website which looked like it was for the HMRC (Inland Revenue) website, but when you look closer you can see that the address is in fact not a HMRC address –

http:  / / www. online.  hmrc . gov.  nyyyyasz . com / …………………………………..

I have expanded the URL above to ensure it is not clickable (!) – notice that the above address contains nyyyyasz – what you would actually be clicking on would be a sub-domain of the website (nyyyyasz . com) but the above web address is made to look like the official UK HMRC (inland revenue) website!

If you do a DNS you will see that the above domain is not registered to the UK government anyway!

Be careful – there are people out there on the Internet who want to rip you off.

My Tips to Avoid Being Ripped Off

1. Shred all bank statements, credit card statements etc – opt electronic statements if possible.

2. Never click a link in an email from a source you are not familiar with.

3. (I) never click links in emails purporting to be from my bank, mortgage company or credit card company – I simply log in through the usual web address and check my “messages” – if in doubt phone/email your bank/credit card company/mortgage lender to see is they sent the email.

4. Often emails like this are made to provoke a negative reaction from the recipient – the wording is such as to infer a negative outcome if you don’t click and take action immediately – they are simply trying to catch you off your guard such as

“warning – we will cancel your account”

“you owe us tax”

“someone has tried to log into your account fraudulently”

you get the idea.

THINK BEFORE YOU CLICK!

 

Please tell friends, family and colleagues about this scam – it could save the a lot of hassle, time, money and heartache.

Personal Finance Questions – September 2009

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In our regular feature we will cover some of the topics which readers have been emailing us about. Naturally we can’t give direct financial advice but maybe some of these questions and their answers will be of interest to you.

I hear that ISA rules are changing in October, how does this affect me?

ISA contribution limits are changing on 6th October – here are some of our more popular articles on this subject –

Confused about the new ISA allowances and limits?

Reminder – cash ISA allowance is increasing

Change in ISA allowances – Budget 2009

What is an ISA?

My life insurance company wants to apply a Market Value Reduction if I surrender my Bond, why?

A Market Value Reduction can be applied on the surrender of a with-profits bond (or any with-profits fund for the matter) in times when stock markets and other asset classes may have fallen in value – we have seen this recently with the fall in world stock markets in 2007 and 2008.

The MVR is designed to provide you with a fair surrender value for your plan based on the performance of the underlying investments and also to protect those who remain behind  by basically ensuring you don’t take a “bigger slice of the cake” than you’re entitled to!

This article goes into more detail – Avoiding a Market Value Reduction (MVR/MVA)

I find it difficult to budget – how can I make this easier?

We all have income and expenditure to meet – some of it is the same each month, and some of it is variable.

I wrote an article a few months ago – cashflow forecasting – income and expenditure – there is a great spreadsheet you can download to help you plan and track your monthly income and expenditure.

I have a personal pension – what is the minimum age I can retire?

It is currently age 50, but this is about to change – see this article for more details and urgent actions you might need to take if you’re aged between 50 and 53 now.

My mother is a non-taxpayer. How can she reclaim tax paid on her building society interest?

To reclaim the tax she needs to complete an R40 – she can also register to receive the interest gross from now on – read this article.

And finally……

Be sure to subscribe to our newsletter – it’s free and you can cancel it at any time.

Also – did you know you can receive our blog posts via RSS.

A few interesting blog posts you might like

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I thought I would post about a few interesting articles I have read recently – I thought you might find them interesting reading – a little light relief from all this ISA allowance increase, change in pension age malarkey!

Rob over at MoneyWatch posted an interesting article “Create a Home Inventory” which got me thinking about an old game we used to play at cubs – the cub leader would bring our a tray with about 20 different items on and we used to have a about 20 seconds to look at the tray. The tray would then be taken away and we had to try and remember as many as possible.

I am sure if the worst happened and I was burgled or had a fire I would be able to remember a lot of things but I know for sure that I would not remember everything – I am therefore going to start cataloguing all my possessions – a spreadsheet will do the trick!

Meanwhile, Lee over at FivePencePiece, when he was not busy with Labour Party conference or his appearance on the radio wrote an article entitled Patience is a Virtue. Lee reminds us that nothing happens overnight and that “a journey of a thousand miles begins with a single step”.

I read a book many years ago on the subject of goal planning – one of the most important chapters for me talked about the need to take any task which at first glance might seem very difficult and break it down into smaller, more manageable “chunks” – for example, if you’re overweight and need to lose say 3 stone then this in itself is quite an achievement.

But if you break it down and say “I will lost 1lb per week” which is more than possible given some exercise and changing your diet, then you would achieve your waste loss goal in 42 weeks!

The final blog post I liked recently was “51 Unusual Money-Saving Tips” from over at WiseBread – I love lists – I am always making lists (mainly “to do” lists!) and love this kind of post – it acts like a hub with so much information coming off this hub in a series of “spokes” – just like a wheel on a bike.

Anyway – there should be enough for you to be going on with there – please let me know which posts you have read recently by posting a comment and a link below – please feel free to link to other personal finance blogs you visit.