If you’re searching for a savings account that can help you to really stay on track for your retirement, one that will help you to reach your retirement fund goals faster, then ISAs can be a great option. There are many ISAs to choose from, all of which bring something special to the table, whether you need an account that allows instant cash access or you want a savings account that will prevent you from accessing the funds for a determined amount of time.
An ISA, also referred to as an individual savings account, allows you to earn interest without having to pay income tax. However, you’ll be limited regarding the amount of funds you can put into your account each year.
With an ISA, you’ll have a set allowance every tax year, which will allow you to invest or save money up to a determined amount and all without having to pay any taxes on your returns.
How it Works
If you have an ISA, your allowance is typically twenty thousand pounds a year, with the tax year running from April sixth to April fifth the following year. When a new tax year begins you’ll have a new ISA allowance to spend. This will occur on the first day of each new tax year.
If you don’t use up all of your allowance for the year, then it will be gone and you will not be able to carry the remaining balance to the next year.
You won’t have to pay any income tax on the money you save in your account, just as long as you don’t pay in more than your allowance every year. This applies to additional rate and higher rate taxpayers, as well as basic rate taxpayers. Basic rate taxpayers will pay twenty percent, higher rate taxpayers will pay forty percent, and additional rate taxpayers will pay forty-five percent.
Who is Eligible?
In order to open an account, you must be sixteen years of age or older. You also must have a national insurance number and reside in the UK. Additionally, this type of savings account can only be held in one person’s name, which means a joint account is not possible.
Exceeding Your Annual Allowance
Typically, the savings account provider will reject deposits that will push you over the annual allowance. If this doesn’t occur and you accidentally go over your annual allowance, the HMRC will contact you.
Savings Account Options
Currently, there are a couple of main types of ISAs to choose from: stocks and shares ISAs and cash ISAs. You can also choose from some specialist accounts.
The cash ISA option allows you to deposit and withdraw funds as frequently as you want. You’ll deposit and tie up your funds for a fixed term, up to the full annual allowance.
With the stocks and shares option, you’ll use your annual allowance as a wrapper in order to make them tax efficient. Your funds will be at risk, however, this savings account option could potentially provide you with a better return than a cash ISA.
As we mentioned earlier, there are a few specialist account options.
First up is the junior option. This type of account is for children only. The Help to Buy ISA is designed for first-time buyers only. The last option is the innovative finance account. This type of account involves peer to peer savings that use an ISA wrapper in order to make it tax-free.
Opening an Account
You can open an account over the phone, by post, online, or in a branch. You’ll be required to put some money down in order to open up a new account. Each financial institution may have their own minimum amount which can range from one pound up to one thousand pounds. You’ll also need to provide basic personal information and read and sign a declaration, which describes how the account works.
After you’ve signed up, you’ll be given a certificate or passbook that will be used in order to make changes to your account or to make a withdrawal.
If you have a flexible ISA you can take money out and pay it back during the same tax year and it will not affect your annual allowance. You’ll also be able to withdraw funds you have from previous years and you’ll have until the end of the year to pay it back. However, if you end up transferring your account to a new provider and you haven’t paid the funds back yet, then any deposits you make will count towards your annual allowance.
If You Don’t Have a Flexible Account
Any funds you attempt to put back in your account will negatively affect your annual allowance. Additionally, the payment will be rejected if you have exceeded your annual allowance for the tax year. Should you withdraw the funds and transfer it into a standard savings account, the money will automatically lose its tax-free status..
Transferring Your Account
If you find a provider that offers a better interest rate, then you can transfer your account. This process is referred to as a transfer in. If you transfer your account by using a cheque, or by withdrawing cash then you will end up losing its ISA status. Transferring your account means that you won’t lose the annual allowance that you’ve built up with your old account.
If you do decide to switch providers, make sure you never withdraw your savings from your active ISA account and use those funds to pay into a new account. Doing so means that you will lose the tax-free status automatically. Instead, you must contact the provider you want to switch your account to and inform them that you want to move your savings. The new provider will require you to fill out a transfer form and will take care of the switch from there. Keep in mind that not every ISA provider will accept a transfer.
Remember, before making the switch to a new provider, you must do a little research. Make sure there are no hidden charges including exit fees. Additionally, if you’re not sure your current ISA provider has an exit fee, you may want to look into this before you decide to make the switch. These exit fees will charge you for switching to another provider, and some providers can charge a steep fee. If your current provider does charge an exit fee, search for a new provider that’s willing to reimburse you.
So, what will happen to your account in the event you pass away? Following your death, when your estate is being administered, your account will lose the tax-free status. This means your estate will be responsible for paying income tax on any interest that’s added to your account. Using a process referred to as an additional permitted subscription, your spouse or civil partner can also change your account into their name. It applies to both stocks shares and cash ISAs.
ISAs and Annuities: What is Annuity?
If you want a comfortable lifestyle after retirement, then you’ll need to carefully plan for it. Choosing an annuity and investing in an ISA are both great options. However, while the rules around how and when you can take your pension funds have become much more flexible over the years, there are still a number of reasons why you may be a little wary of the pension market.
Many people are enjoying the benefits of a company pension scheme, which includes a tax relief and contributions from an employer. Most people feel that there’s no better way to save for their retirement. But when it comes to an ISA or private pension, where should the bulk of your money go?
Here are some things you should consider:
ISAs Taxes and Annuity Taxation
One of the main advantages an annuity has over an ISA involves taxes. The pension provider can claim taxes back on your contributions. This means, every one hundred pounds you invest, if you’re a basic rate taxpayer then you’ll get back one hundred and twenty-five pounds into your pension. Those who pay a higher tax rate will be able to claim the difference via their tax return.
To learn more about pensions and annuity taxation, click here.
Many people will choose to purchase an annuity with their pension pot because it provides a guaranteed income for life. If you research the market, then the right annuity can offer an unrivaled level of security.
If you have an ISA then you can take an income from the investment returns or interest on your pot, or you can take some of the actual pot itself. However, you must keep in mind that once you start to dig into the ISA capital then the amount of interest you earn can go way down.
Making Your Money Last by Choosing the Right Annuity Type
If you’ve signed up for an annuity, then you’ll enjoy a guaranteed income for life, however, if you’ve decided to drawdown your income through investment growth in the fund, then chances are that your funds can potentially run out before you die, significantly reducing your income annually.
To learn more about the different annuity types, click here.
The Best of Both Worlds: Annuity Tips and ISA Planning
Both the ISA and the annuity are the UK’s most popular savings options and millions of citizens have both. But the best place to keep your cash will not be the same for everyone. If you have both a savings account and an annuity it can limit your exposure to the risk of future reform. In fact, when it comes to saving for retirement, most financial advisors recommend saving through a combination of ISAs and annuities in order to safeguard your future during retirement.
If you have an annuity and an ISA, then you must split your finances in half. One half is devoted to building up your savings while the second half is used for your monthly expenses.
If you want a solid plan for your retirement, click here to read our article on annuity tips.