Reminder – Cash ISA Allowance is Increasing!

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Just a quick reminder that, as of 6th October 2009, the maximum which someone aged over 50 can pay into a Cash ISA in the current tax year is increasing from £3,600 to £5,100.

(The increase comes into effect for those aged under 50 from the start of the next tax year on 6th April 2010!)

In the last Budget, the Chancellor of the Exchequer increased the Stocks and Shares ISA allowance from £7,200 to £10,200 for those aged over 50 (before 5th April 2010) with the increase coming into effect on 6th October 2009.

Many will have already made their maximum contribution of £3,600 for the current tax year with the intention of topping it up to the £5,100 limit on 6th October 2009. There have been rumours that some organisations are not allowing the top-up to the new limit to be added to the existing ISA.

As you can only have one ISA with one provider in the current tax year it will be necessary to transfer the cash ISA to a new provider who will allow the top up.

Very Important – If you wish to transfer to another ISA provider then you must approach them first – they will provide you with a “transfer application” – once completed the new Cash ISA provider will approach your current provider for the transfer amount.

You CANNOT transfer to another ISA provider by “cashing in” your current ISA – if you have already invested money in an ISA, once you take it out you cannot put it back in!

And finally……

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Related Posts

Changes in ISA Allowances – Budget 2009/2010

New Tax Year – New ISA Allowance – 2009/2010

Personal Finance Questions – April 2009

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In this new feature we will answer some of the many questions we have been receiving from visitors to shrewdcookie.com. It is often said that if you ask a question chances are that many other people also want to ask that very same question.

Although we receive a large number of personal questions we have to remind you that we do not give financial advice on this website – we encourage you to visit an independent financial adviser, solicitor or accountant if you wish to discuss any particular course of action which may be prompted by an article you read on our site.

1. What are the new ISA allowances announced in the recent Budget?

The ISA limit is increasing from £7,200 to £10,200. The change comes into effect for the over 50’s from 6th October 2009 and from 6th April 2010 for the rest of the population. Of the new £10,200 limit, upto £5,100 will be allowed for Cash ISA investment, with any surplus between the amount you place in a Cash ISA up to £10,200 being available to invest in a stocks and shares ISA.

2. Inheritance Tax – who pays?

The liability for paying inheritance tax lies in the hands of the executors/administrators of the deceased’s estate. Inheritance tax is payable within 6 months after the end of the month in which the person passed away. It is possible to pay Inheritance Tax in instalments over up to 10 years – this is the case in circumstances where say the estate includes a house. There is an interest charge if you pursue this method of paying Inheritance Tax – http://www.hmrc.gov.uk/ for more details.

3. I am married to someone who was not born in this country – how does this affect our Inheritance Tax position.

Where a spouse is deemed to be non-Uk domciled then the Interspousal transfer is limited to £55,000, there in no limit to the Interspousal transfer where both partners are UK domiciled – no liability to inheritance tax on first death if you leave all your assets to your marital partner. Consult a solicitor or accountant about your own particular situation.

4. How do I get a State Pension Forecast?

To obtain a forecast of your state pension entitlement, based on your national insurance record you need to fill out and submit a form BR19 – this article – “How Much State Pension will YOU get” gives more details.

5. If I invest a lump sum now how can I easily calculate how it will grow between now and retirement?

Using the Rule of 72 – by assuming an interest rate and dividing this into 72 will tell you how long that money will take to double in value. For example, at 6% your money will double in value every (72/6) 12 years. If you had say 36 years to retirement, at 6% growth your money would effectively double 3 times. See this article for more details.

6. Can I back-date my ISA investment to use last years allowance?

No – your money needs to be invested by midnight between 5th and 6th April each year to use the ISA allowance for that tax year – there is no way to backdate an ISA investment. A case of “use it or lose it”!

7. I am a female born in 1954 – when do I get my State pension?

State retirement age for men and women is being equalised to 65 for both sexes. See this article . There is also a State Pension Age calculator provided by The Pension Service – enter some basic details and it will tell you exactly when you qualify for your State Pension.

8. Can I hold Cash in a Stocks and Shares ISA? What is the tax liability?

Yes – many providers offer a “cash park” facility whereby you can invest temporarily in cash and then switch into stocks/funds over the short term. There is the facility to receive interest on this cash held but the interest is subject to tax and a non-taxpayer cannot reclaim this tax either. See this article for more details.

9. What is the minimum deposit on a mortgage for first-time buyers?

There is no legal minimum deposit, the minimum is set by market forces – we are currently suffering from the “credit crunch” whereby lenders are being cautious about lending to people particularly with the housing market currently falling. Therefore, more and more people are being expected to make a deposit when buying their first homes – typically 10% or more is required to obtain a good interest rate product – see “5 tips for first-time buyers” for more details.

10. What is the “deferred period” on my income protection plan for?

The deferred period is the time between notifying the claim to the life office and the benefit being paid out. The plan is designed to provider a replacement income in the event of long-term absense due to illness or accident. The longer the deferred period, the lower the risk to the insurance company of having to meet a claim which therefore means a lower premium. See these article on “income protection” for more information – “Income Protection – an introduction” and “Critical Illness Cover versus Income Protection”.

These are just some of the areas we have received enquiries on in the past month. Although we cannot reply directly please ask a question and we will try to feature it in the next FAQ article next month. Add a comment below or complete this short form to contact us.

Simon

Top 10 Articles – April 2009

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The following is a list of the Top 10 articles visited in April 2009: –

1. New Tax Year – New ISA Allowance

The start of the new tax year on 6th April 2009 marked the opportunity for another tranche of money to be invested in a tax-efficient manner in an ISA.

2. Change in ISA Allowance – Budget 2009

In his recent Budget, the Chancellor of the Exchequer increased the ISA allowance to £10,200 per tax year – read the above article – the devil is in the detail!

3. Budget 2009 – Key Changes

A summary of the main changes and issues covered in Budget 2009 which may affect you and your wealth.

4. Tax Allowances and Rates – 2009

The start of the new tax year on 6th April heralded a number of changes in rates of taxation and allowances – read the article above to see just how much more money you will pay in tax this year.

5. It’s not how much you save, it’s how long

A great article introducing the time value of money as well as the principle of compoun growth and interest.

6. 10 Great Reasons to Write a Will

What I feel is one of the most powerful and beneficial articles of the last month – if you do nothing else this year, please read this article and make a Will.

7. An Introduction to Inheritance Tax

Inheritance Tax is a tax paid by those who distrust their children more than they distrust the Government. Plan early to avoid the simplest of taxes to avoid.

8. Cashflow Forecasting – plan your cashflow for the next 12 months

Short article on the principle of cashflows – how controlling your cash is an excellent habit to form – handy Excel cashflow spreadsheet available to download as well!

9. “Parking Cash” in an ISA

Great facility allowing you to place full amount into an ISA without the need to commit to investing the full amount from day one if you are concerned about stock markets and other asset classes falling further.

10. State Pension – how much will you get?

An introduction to the State pension with valuable information on changes in state pension age as well as how to obtain your own State pension forecast free of charge!

The above list details the Top 10 articles published on shrewdcookie.com in the last month based on visitor data.

Please subscribe to the Shrewdcookie.com RSS feed to receive all our articles as soon as they are published – click here.

Concerned about Stock Markets? ISA Cash Park

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How to Park your Money in an ISA

Many people are concerned about the current state of UK and world stock markets, together with other investment asset classes, yet they would still like to utilise their ISA allowance for the future tax-efficient benefits which an ISA investment can provide.

There is a solution.

At present it is possible to invest up to £7,200 into a Stocks and Shares ISA, with up to £3,600 of this limit being allowed to be held in a Cash ISA – with the balance available to be placed into a Stocks and Shares ISA.

For example, if you invested £2,000 into a Cash ISA in the current tax year, you would still be able to invest £5,200 into a Stocks and Shares ISA.

Following the announcement in the Budget today (22nd April 2009) by Chancellor of the Exchequer, Alistair Darling, the ISA limit will increase from £7,200 per year to £10,200 per year total (which can include up to £5,100 in a Cash ISA) for those aged over 50 on 6th October 2009, and with the remainder of the eligible population being able to invest £10,200 from the start of the next tax-year on 6th April 2010.

Many people would like to invest their full allowance within an ISA but are concerned with continuing stock market volatility and econnomic uncertainty over the short to medium-term.

Many ISA providers are acutely aware of the concerns which investors have at present in placing their money into equity and other asset classes. They are therefore offering a “cash holding” or “cash parking” facility whereby an investor can place money into an ISA today, thereby securing their entitlement to their ISA allowance and deferring their investment decision to a later date when they may feel more confident about economic conditions and stock market outlook.

The money held in the “cash park” of a Stocks and Shares ISA may receive interest (see below regarding tax position).

Important Points to Note

Any money held as “cash” within an ISA is a temporary position as the Inland Revenue expect you to ultimately invest these funds into funds. The cash fund may receive interest whilst the funds are held as cash – this interest will be subject to 20% taxation – which is in line with the tax position on interest received from a bank/deposit account.

The main difference here though is that this tax is not reclaimable by a non-taxpayer.

No Cash in a Stocks and Shares ISA

It is also important to remember that regulations do not currently allow a “cash” fund to be held under a Stocks and Shares ISA – therefore any decision to invest cash into this type of ISA must ultimately be made with a view to investing in mutual funds at a later date.

Conclusion

This is a useful facility for those people wishing to invest in an ISA but not wishing to commit their funds to a fund carrying risk in the current economic and investment climate.

Change in ISA Allowances – Budget 2009

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Budget 2009 – ISA Allowance Increased – from 6th October 2009

In his Budget speech on the afternoon of 22nd April 2009, Chancellor of the Exchequer, Alistair Darling, announced that with the maximum amount which can be invested in a tax-efficient ISA will rise from £7,200 to £10,200.

(Ed. – This rise is long over due, with the only previous rise, since ISA’s were introduced in 1999, being  from £7,000 to £7,200. Had the ISA allowance increased in line with average earnings inflation since 1999 then today the ISA allowance should be in the order of £10,500).

New ISA Allowance Limits

Investors will be free to choose whether to invest the full £10,200 into the Stocks and Shares element or to place up to £5,100 into a Cash ISA, with the remainder of the allowance being invested in a Stocks and Shares ISA.

When do the new ISA Allowance Limits Start?

This change in ISA allowance will see the total amount which can be invested in a tax year increase to £10,200 from 6th October 2009 for those aged over 50 with the rest of us being entitled to the additional allowance from 6th April 2010 – effectively 12 months to wait for those under 50.

In reality though the increase in allowance, although welcome, will see only a small increase in the amount of tax saved by UK investors in Cash ISA’s given the very low level of current interest rates.

For example – for a Cash ISA investor this means that an additional £1,500 can now be invested in a Cash ISA.

With the average Cash ISA paying in the region of 2.5% -3.0% gross, the actual tax saved will be between £7.50 and £9.00 per annum under current interest rates.

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New Tax Year – New ISA Allowance – 2009/2010

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ISA Allowance 2009/2010

Yesterday, 6th April 2009, marked the beginning of a new tax year – all last year’s planning is now closed and we each start the new tax year with a clean slate and the opportunity to make positive changes in our personal finances.

With the dawning of a new tax year comes the ability to contribute to another ISA allowance.

Our article “ISA’s – Individual Savings Accounts” gives more information on what an ISA is – the different types available, the tax treatment etc.


New ISA Allowance – 2009/2010

In the current 2009/2010 tax year the investment allowance into an ISA remains the same at a total investment allowance of £7,200.

This can be broken down into two constituent parts – up to £3,600 can be invested in a Cash ISA (a little like a savings account with a bank or building society, only with interest paid with no income tax deducted) – with the remaining amount up to a total subscription of £7,200 across both ISA types being available.

For example, if you invested £2,000 into a Cash ISA you could still invest £5,200 into a Stocks and Shares ISA.

22nd April 2009 – In the budget today, Chancellor of the Exchequer announced changes to ISA allowances which come into effect on 6th October 2009 for over 50’s and for the rest of the population from 6th April 2010 – click here for more details.

I didn’t utilise my full allowance last year, can I top it up?

No, once the clock strikes midnight on 6th April a new tax year starts and all subscriptions to last year’s ISA are complete – no more money can be paid in. In practice, if your Cash ISA is administered in the traditional way through a passbook with a bank or building society, you will more than likely continue to pay money into the same book – it is just your allowance for the current tax year which limits the amount you can pay into the account.

Can I have my Cash ISA and Stocks and Shares ISA with different companies?

Yes – you are free to hold your Cash ISA with a different institution to your Stocks and Shares ISA.

Are they expensive?

Typically when investing in an ISA you will incur an “initial charge” – usually in the region of 4%-6% depending on the fund you are investing in, together with an “annual management charge” of between 0.75% and 2.25%.

Many people invest through a discount “supermarket” where the investor may benefit from a discount on their initial and annual management charges.

Can I invest in more than one Cash ISA in the current tax year?

No – once you commence saving into one Cash ISA all contributions in that tax year must be into that Cash ISA with that institution.

Can I Transfer Previous Cash ISA’s and Stocks and Shares ISA’s to another bank or investment house?

Yes, you are free to transfer previous years ISA’s to another provider.

A word of warning here though – you need to TRANSFER your ISA – ask the new company for a TRANSFER form – they are the ones who must contact your previous provider and arrange the transfer. Under no circumstances simply close the existing ISA and take the proceeds to a new institution – it won’t be accepted as a transfer!

Stocks and Shares ISA’s – aren’t they risky?

Yes they can be – a normal course of action would be to invest in a unit trust shielded through an ISA wrapper. A unit trust will normally invest in a range of stocks and shares depending on what that fund is trying to achieve. In these types of fund your money is not guaranteed, you could lose money, you could get back less than you originally invested.

These types of ISA should be viewed as a medium to long term investment – minimum of 5 years although it would be wise to work on a minimum 10 year investment horizon.

Before investing in any asset-backed investment such as a Stocks and Shares ISA it is prudent to ensure you have saved sufficient “rainy day” money into a savings account – this is money you can access easily and they should ideally be invested in a savings/deposit account were the value of your account isn’t susceptible to falls in the value of underlying investments.

How much Rainy Day Money?

Everyone is different – some people may be comfortable with say 6-12 months net income plus all likely expenditure over and above your normal expenditure which you feel may be incurred over say the next 2 years. Others would wish to save considerably more.

The yardstick for any decision to invest in a Stocks and Shares ISA must therefore be – how long are you prepared to invest this money for and are you prepared to lose some or all of it if your investments don’t perform well.

For example, if you need a new car next year it would not be wise to invest these monies in a Stocks and Shares ISA because of the risk of your money falling in value over the short-term.

If you are concerned about risking your money then please seek advice from an Independent Financial Adviser.

ISA’s – Individual Savings Accounts

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As we approach the end of another tax year on 5th April many will be mindful of the need to fully utilise their ISA allowance –  you may have heard people mention ISA’s but you’re not quite sure what they’re all about – something tells you they’re risky!

What is an ISA?

An ISA (Individual Savings Account) is a form of tax-efficient savings and investment product. Following recent changes in legislation there are now two types of ISA with which we are concerned: –

Cash ISA

A Cash ISA is a savings account, normally through a bank or building society, as well as National Savings, which effectively pays interest tax-free. Cash ISA’s are available to anyone over the age of 16.

With a normal savings/deposit account tax is deducted from gross interest and the saver receives the net amount – the current rate of tax on interest is 20%. There is no additional tax to pay for a basic-rate tax payer; a higher rate tax payer will pay an additional 20%.

With a Cash ISA though, anyone, regardless of their tax position, can invest up to £3,600 in the current tax-year to benefit from tax-free interest. The government place a limit on the amount you can invest in your ISA due to the tax-efficient nature of the investment.

Non-taxpayers – did you know?

If you are a non-taxpayer you can register to receive your interest on your bank and building society accounts gross – you need to fill in form R85 – getting your interest without tax taken off – simply complete the form for each account/institution and pass to them to amend their records.

Where can I find the best rate?

League tables are generally published in the better quality newspapers, or alternatively you can search on line at a comparison site, such as moneyfacts or any other cash ISA comparison site.

Are they instant access?

Generally, yes, but a number of products offer a higher rate of interest, or even a fixed rate, in exchange for you not making any or many withdrawals – you can normally access your money though with an interest penalty applying. Make sure you check the terms and conditions for any cash ISA you choose to invest in.

Stocks and Shares ISA’s

These are for the more adventurous investor. The overall allowance for investing in ISA’s is currently £7,200 per person per tax year. Any investment made into a cash ISA in the current tax year will count against this allowance. For example – say you have put £2,000 into a cash ISA, you are therefore able to invest an additional £5,200 into a stocks and shares ISA.

Lump Sum or Regular Contribution?

It is possible to set up both single premium and regular monthly ISA’s. If you go for the regular option this would equate to £600 per month if you spread your allowance across the full tax year.

Where can I invest?

There is an enormous choice of places to invest your Stocks and Shares ISA allowance – you could choose to invest direct into the shares of a few companies, or you could reduce the risk slightly by investing in “pooled fund(s)”.

By investing in a pooled fund, the investment manager pools your money together with the money of all the other investors in the fund, and invests the money by buying and selling shares and other assets in line with their management style. The benefit of this is that the investment manager and their team can use their investment expertise and research to invest in companies they believe are going to provide an above average return going forwards. The second benefit is that your money, through a pooled fund, will be spread over a far wider range of companies – therefore reducing the risk to your money.

You can invest either direct with a fund manager or through a “fund supermarket” – the latter option will give you access to a large choice of different funds from a wide choice of investment managers. Fund supermarkets can sometime negotiate discounts on the charges and pass these savings on to their clients.

Charges?

Yes – normally with a pooled investment there will typically be an “initial charge” which can be from 0% upwards with initial charges typically being in the region of 5%. There might also be an “annual management charge” – this covers the ongoing costs of running the investment fund. These AMC’s are typically in the region of 1% – 2% per annum – check the charges on any fund you choose to invest in prior to committing your funds.

Is there a risk?

Your money is being invested in a fund(s) which the manager will invest in a range of stocks and shares of companies, corporate bonds, gilts etc depending on the investment strategy and type of fund you choose.

I am sure you will be aware of the recent falls in world stock markets. Any fall in stock markets will be reflected in the value of your investment – so yes, you could lose some, or even possibly, all of your money. For this reason you need to ask yourself whether you are prepared to take risks with this money – and also to give consideration to the length of time you are willing to invest for – a minimum of 5 years, and preferably 10 years would be a good answer here!

Why invest in ISA’s?

The benefit of ISA’s is that they grow in a very tax-efficient manner and any income you receive from your ISA is also tax-free. In addition to this it is also possible to access the money invested if the need should arise.

Many people use their ISA allowance to save and invest for longer term goals – such as a house move in 5 or 10 years time, or to provide income in retirement, to supplement other pension income – some people prefer to invest in ISA’s than in personal pension plans due to the fact that they can access their ISA money – although that can be too much of a temptation to some people!

Summary

There are two different types of ISA and you can invest up to £7,200 in the current tax year. Once we pass 5th April you will lost your ISA allowance for the current tax year – once gone it is lost forever.

Risk Warning

With a stocks and shares ISA there is risk to your capital – the value of your investment is not guaranteed, the value of the investment, and the income from it, can fall as well as rise. You could lose some or all of your money.

If you have any comments to make on ISA’s please add them below –