Your 2012-2013 ISA Allowance – Use It Or Lose It!

The clock is ticking as we head towards this tax year’s deadline of 5th April. You have until then to use your annual ISA allowance – a maximum of £11,280 this year (and £11,520 next year). You cannot carry over your allowance from one year to the next; if you do not use it, then you lose it.

What are ISAs?

ISAs – or Individual Savings Accounts to give them their full name – are a tax-efficient way of holding cash, shares, bonds and collective investments such as unit funds. Up to half the allowance can be in cash with the balance in stocks and shares. So if you decide not to invest any cash in an ISA this year, you have the full £11,280 to invest in stocks and shares. Or you can invest £5,640 in cash and £5,640 in stocks and shares. It all depends on your attitude to risk and returns. Currently, cash savings accounts are paying historically low rates of return, whereas stock market indices are rising. But there is no guarantee that things will stay that way. Over time you can build up tens or even hundreds of thousands of pounds in ISAs, which are often seen as a more flexible way of saving for retirement than pensions can provide. Of course you should always take expert advice on the relative merits of ISAs and pensions for retirement planning.

Tax breaks for ISAs

There is no tax to pay on income from an ISA. It does not have to be declared on your tax return form. Investments in cash or bonds pay out gross income (i.e. no tax is taken off) and dividends from shares are paid after a 10% tax credit has been deducted first. ISA investors cannot reclaim this. Importantly, as your holding in ISAs increases over the years, any profits on ISAs are free of capital gains tax.

What’s the best ISA for you?

As with most financial affairs, it pays to take independent financial advice from experts in investing your money wisely. Here at Marchwood IFA, based in Chichester, we have access to a number of Structured Deposit Accounts, which are essentially Cash ISAs. They have all the same protection that you would get from High Street bank account, up to £85,000 protection under the Financial Services Compensation Scheme. For example the FTSE 100 3 year deposit plan 40 is a structured deposit account that is popular with our customers who are looking for a higher return than current Cash ISA savings account interest rates. It offers the potential of 14% tax-free return over 3 years. If the FTSE 100 is not higher than its starting point after the set terms then you are guaranteed to get back your original capital. We have found that many of our customers have transferred their existing Cash ISA accounts with the High Street banks to structured deposit accounts as they are capital safe products, so there is no risk of losing the money you are investing. The only real risk is that the FTSE doesn’t increase in value and so you receive no return on your investment over the investment term.

Look out for the deadline

For the structured deposit account highlighted above, there is an ISA transfer deadline of 28th March 2013. So don’t delay; contact us today about how to make the best use of your tax-free ISA allowance!