Archive for ‘Tax Free Savings & Investments’
What is an ISA?
In this article, Scottish Friendly look at the different types of ISAs available. If you’re considering setting up an ISA, either for yourself or for a child, the good news is that the process is fairly straightforward.
ISAs explained
An ISA is basically a tax-free wrapper that allows you to shelter your money from the taxman. There are three different types of ISA available — a Cash ISA, a Junior ISA and a Stocks and Shares ISA (sometimes called an Investment ISA).
With all types, any interest earned on savings or bonds and any capital gains made on investments within the ISA are tax free. Because of the tax breaks, there are limits on the amount that can be invested in each tax year. How much depends on the type of ISA you choose. Tax treatment depends on individual circumstances and tax law may change in the future.
What is a Cash ISA?
Usually offered by a bank or building society, a Cash ISA is a savings account where the interest isn’t taxed. Because of this, a Cash ISA can, in some cases, offer a higher rate of interest than taxed accounts from the same bank or building society. There are a variety of Cash ISAs to choose from, such as instant access, fixed rate and accounts with base rate guarantees.
How much can you put in a Cash ISA?
You can invest up to £5,640 in a Cash ISA in the current tax year (2012/13). As the maximum annual ISA allowance is £11,280, you can invest an additional £5,640 in a Stocks & Shares ISA.
What is a Junior ISA?
A Junior ISA (JISA) lets family and friends make long term tax-free investments for a child. Children under the age of 18, who didn’t qualify for a Child Trust Fund, are eligible. The JISA is held on behalf of the child, until they reach their 18th birthday. At that point, they may withdraw their money – the money in the account can only be taken out by the child – or allow the JISA to turn into a full adult ISA. Once set up, anyone can contribute to a JISA including friends, grandparents and family.
Types of Junior ISA
There are two types available — a Cash Junior ISA and a Stocks & Shares Junior ISA. A Cash Junior ISA works in the same way as a bank account where the money you pay in gains interest according to the bank’s rate.
The Scottish Friendly Junior ISA is a Stocks and Shares Junior ISA. In the case of this product, you can invest from as little as £10 a month, lump sums from just £50, or a mix of both. Your money would be invested in the stock market, so the value could go down as well as up.
How much can you invest?
The total amount you can invest is up to £3,600 in the current tax year (2012/13), less any amounts you may be saving in a Cash Junior ISA.
What is a Stock and Shares ISA?
A Stocks and Shares ISA – also referred to as an Investment ISA – invests your money in the stock market, in investment funds or individual stocks and shares. This type of ISA aims to provide capital growth in the longer term. It’s important to remember that your money is invested in the stock market, so the value can go down as well as up.
How much can you invest?
The total amount you can invest is up to £11,280 in the current tax year (2012/13). This is the maximum annual ISA allowance. You can choose to put the full allowance into a Stocks & Shares ISA or hold up to £5,640 of the allowance in a Cash ISA with another ISA manager.
You can invest from as little as £10 a month with a My Choice (ISA) from Scottish Friendly - or you can get started with a lump sum payment from upwards of £100 with this plan. Remember, the value of the My Choice (ISA) can go down as well as up and your original investment is not guaranteed. Please also note that tax treatment depends on your individual circumstances and the levels and basis of taxation may change in the future.
Scottish Friendly has provided no advice in relation to these plans. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial advisor for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk Advisers may charge for providing such advice and should confirm any cost beforehand.
The Choice to use your hidden ISA allowance
In recent decades, Scottish Friendly has been at the vanguard of technological change. We were one of the first financial services organisations to launch a website back in 1997 and, more recently, our award-winning back office system has attracted leading financial organisations.
In 2012, our 150th anniversary year, we are once again leading the way with a revolution in online investing, a revolution that will transform the way in which you do business with us and maintain your investments.
A clear finding of our extensive market research is that people like ISAs, and they like them because they’re simple, tax-free and have no complicated tax rules that lock your hard-earned money away. They are instantly recognised by the vast majority of people in this country as (to borrow a New Labour phrase) the ‘people’s tax break’.
However, we noticed in our focus groups that people would only refer to their cash ISA allowance; few if any had heard of the other half of their ISA allowance.
The hidden half of your ISA allowance
While you only have one ISA allowance, it is essentially broken down into two parts. Your Cash ISA allowance (up to £5,640) and your Investment ISA* allowance (£11,280 minus any amount you have invested in a Cash ISA). So in other words if you max out your Cash ISA allowance, you can still invest another £5,640 and avoid tax.
Unfortunately, because it’s little known, only a small fraction of the population actually make use of this other half of their ISA allowance. Alas, this means that this part of the people’s tax break has become the preserve of the wealthy and well advised. Our new approach to ISAs aims to change all that.
Our new products will allow investors to use their Investment ISA in bite-sized chunks enabling them to have a range of individual plans all wrapped within their Investment ISA allowance.
There are two fantastic strands to this exciting new innovation. My Plans is your own personal Scottish Friendly online space where you’re in charge of your Scottish Friendly investments. Secondly, there’s My Choice (ISA), which is the first of Scottish Friendly’s products that you’ll be able to manage online.
My Choice (ISA)
Many of you already invest in a Scottish Friendly ISA, but My Choice (ISA) is different!
As well as allowing you to take out an ISA (by investing from as little as £10 a month), once you register with My Plans, you’ll be able to set up separate life policies within your ISA. This will allow you to plan, monitor and manage your personal and family’s finances.
This can make your Investment ISA* allowance that bit more manageable and useful.
So, for example, you can set up two policies, paying in £10 a month to each, for your two children. Maybe another for £15 a month (but increasing automatically by 5 per cent a year) for a rainy day or perhaps that big family holiday. You can even tag (or name) each policy with something meaningful – say, the kids’ names.
The My Choice (ISA) will come with a range of, initially, four funds from which you can choose. Select one, two or all four to include in your ISA investment. The funds include UK Active, UK Tracker, Government Bonds and International Company Bonds.
Over the years, we’ll be adding to this range. As well as being able to stop, start, increase and decrease your investment or even cash in, you will also be able to set a level of escalation so that the amount you contribute to your My Choice (ISA) increases on a regular basis by an amount that you set and which you can change when you wish.
Over the next 12 months, we’ll be launching a number of new ISA products, each with different investments and choices. All will be built to make it as easy as possible for you to exploit the other half of your ISA allowance, ensuring that the people’s tax break is enjoyed by everyone.
Remember that Scottish Friendly’s MyChoice ISA invests in the stock market, and that the value of shares can go down as well as up and so returns are not guaranteed.
*Legally this is known as your Stocks & Shares ISA Allowance but we use the phrase Investment ISA allowance to clarify that you don’t have to invest in the stock market but can choose Government bonds, property funds, corporate bonds or different investments.
Tax treatment depends on your individual circumstances and tax law may change in future.
No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.
10 ways to teach your children to be money-wise
Recently an independent commission found that thousands of students are being put off applying to university by a rise in tuition fees. The first report revealed that applicant numbers to English universities are down 8.8% compared with two years ago – around 37,000 fewer students[1].
When you look across the rest of the UK, the conditions facing young people are worrying. A poor graduate job market, higher debt levels and inflation means that careful management of personal finances is key for the next generation. With GCSE and A level results dropping through letter-boxes throughout England last month, university and further education costs are a hot topic. Official figures released in August by the Independent Commission on Fees show that English higher education establishments will now be able to charge students up to £9,000 per year[1] – which could add up to a maximum of £27,000 for a three year degree course. Many young people will be asking themselves: “Can I afford higher education?”
At Scottish Friendly we believe in thinking long term when it comes to navigating a tough financial climate. So in this blog we have split our guide into four key chapters in life with some helpful tips for teaching children of all ages important money skills that will help them get a good start in life. Like any good habit, once you teach your children to establish a positive pattern, saving and managing money well should hopefully become second nature to them and can make a big difference to their adult life.
Throughout their childhood it is also important to remember you can save or invest on their behalf. Help ensure your child gets off to a good start in life by investing from £15 to £25 per month and using their tax-free savings allowance for a maximum of 18 years. Look out for products such as the Child Flexible Plan. You can make tax-free investments for a child aged under 16 to give them something to build on when they start adult life (remember tax treatment depends on their individual circumstances and tax law may change in future).
2-5 years old
- Imaginary play – Children revel in make believe and the simplest play can be turned into a basic lesson on how money works. Empty your penny jar and turn a cardboard box into a shop or ice cream parlour by cutting out a window and door. Put some pots and pans in and play at being a customer with them as the shopkeeper using pennies.
- Counting – Language and numeracy are fundamental skills that we learn from our parents. So counting out loud even early on can familiarise a child with numbers. One thing you could do with a toddler is paint colourful dots on a sheet of paper and count them out loud together. This will encourage the child to vocalise numbers and set the foundations for an appreciation of numbers and counting.
- Watch and learn – Let your little one see you pay for things, and establish the pattern of behaviour in their mind: in order to get the shopping, mummy or daddy has to give some money. For older children you could let them participate, though keep an eagle eye on where the change goes!
5-10 years old
- Savings reward chart – A smart way of encouraging children to adopt a savings mentality. If they have a toy in mind, say the latest Lego space station or Nintendo DS game, cut a picture out of a magazine and draw a Blue Peter style “totaliser” to chart their money saved. Keep a jar close by and let them mark off the increments towards their goal by sticking stars on the chart. Be disciplined though, and make sure they don’t see the money saved as a sweet fund every day!
- Jobs around the house – Understanding that work and being helpful can result in some pocket money and may even take the strain off parents on the cleaning front. Set 5 simple weekly tasks and decide how much each one will cost, then put the money in the savings jar mentioned above.
- Wants versus needs – Establish the difference with your child between what they want, and what they need. They may need a new school pencil case, but they probably want a new bike. Talk to them and explain sometimes it is better to put money into the thing they need, and hard work will result in the things they want.
10 – 16 years old
This age group is critical because of the huge changes that take place in life that will establish how a child perceives, saves and spends money.
- A current account – Many parents will feel the time is write to open a basic bank account for their child to give them some independence and lessons about managing money, security and saving. Parents can use this as an opportunity to explain how banking works.
- Pocket money / a first job – A part time job in the holidays can be a great way to earn some money, gain some experience and meet new people. Whether it is mowing lawns, a paper round or cleaning cars.
- Talk about goals – Your child will rapidly be becoming a young adult and saving for a goal such as a trip abroad, university, or a career. The earlier they can establish goals, the earlier you can work out a financial plan as a family to help them get to where they want. This summer young Olympians including Yohan Blake, Greg Rutherford and Laura Robson are great examples of how aiming for goals can lead to great things. It will have taken discipline, sacrifice and financial backing – but as the saying goes, “Anything in life worth having is worth working for.”
16 and Upward
- University – The big decision will be whether your child will want to enter higher education in the pursuit of a degree or not. If your child decides University is for them, sit down and look at their savings, talk about a budget and how much the family can support them. Research funding help and the best available savings plan for them. The personal finance experts at The Daily Telegraph have just published an article on Student finance: how to manage your student finances, from bank accounts to online discounts, which makes for interesting reading.
- ISAs – Your child will become eligible for standalone ISA investments on their 16th birthday. They could also invest between £15 and £25 a month as part of a Family Flexible Plan, which is run by Scottish Friendly for families in the UK. The purpose of the plan is to let you invest as a family and beat the taxman together! You invest for 15 years but each family member’s policy has built in flexibility, allowing you to cash in your plan early if needed. This is over and above other tax-free allowances such as ISAs. Again, you must remember that tax treatment depends on your individual circumstances and tax law may change in future. Also, if you access your plan value before 10 years you may have a tax charge to pay as well as a £50 deduction from the cash-in value.
We hope these basic tips come in handy when thinking about children’s finance. The key thing is to speak openly about saving and investing. Allow children the right amount of responsibility as they grow and make sure they develop a simple and regular savings habit that helps them towards their goal.
No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.
Reference
[1] Independent Commission on Fees http://www.independentcommissionfees.org.uk/
When to save and invest?
As Bradley Wiggins heroically showed last month with his historic Tour De France victory: timing is everything. David Cameron also recently predicted that macro-economic volatilities would continue for some time. So the Scottish Friendly blog drew inspiration from the Yellow Jersey winner and put our investment hats on to tackle similar questions to those Wiggins must have asked himself as he climbed mountains, out-manoeuvred the peloton, and gradually built a winning margin with well-timed drives. When do I invest? How much can I push to get to the end goal, and how long do I need to do it for?
This week, the picture of the UK economy looked gloomier than it has done for some time. The ONS reported that the UK recession has deepened with the output of the economy falling by 0.7% between April and June [1]. The contraction was much bigger than experts expected and follows a 0.3% drop in the first three months of the year [2]. Ernst & Young ITEM Club’s report also showed consumer credit conditions have worsened for people [3], and when you consider these headlines, it can feel as if financial mountains need to be climbed. When it comes to saving and investing though, it is still possible, and a small change in behaviour, often involving a bit of small change from your pocket, can make all the difference.
If you take saving or investing towards a deposit for a house for example, getting into a habit of putting small sums aside and starting early could be an effective strategy. In terms of timing, as with the Tour De France, you can’t get to your goal in one day, it takes a long term approach. Here’s what I think you can gather from this approach for saving and investing effectively:
Work out how much you can save or invest – Saving or investing for a deposit can seem like a big task, but it may not be as difficult as it might seem at first. Successful savers and investors get into a habit and it can be as simple as not buying a cup of coffee or indulging in a magazine each week. There are savings and investment plans out there that can fit to your lifestyle and offer you the flexibility to contribute more or less each month by direct debit. If you think really hard about it, a small amount each week could be a very realistic goal, but that habitual amount over 10 years could help towards getting on the property ladder, so a little discipline could go a long way.
Establish clear goals – Think about your priorities and make a list of long-term goals. Work out if it is 3, 5 or 10 years in the future and think what you would like to be doing, whether it be setting aside money towards a holiday to Cancun, university fees, a new car or a housing deposit, map it out and stick to the task.
Shop around – There is a wealth of information on the web about different savings and investment products. Money supermarket, Which? and Compare the Market are good places to start looking. Before you commit, make sure you have looked at a range of products and found the right one for your lifestyle.
Keep in mind flexibility and tax efficiency – Think about how you want to save or invest and weigh up the options available. You may want to lock money away, and there are tax efficiencies available for doing so, or you might prefer to have the reassurance of knowing that you have access to the money if you need it. Many people are not aware of friendly society tax-exempt Savings Plans (TESPs). These long term investment plans, under current tax law, grow free of income and capital gains tax (other than tax on dividends from UK shares). Typically, you need to invest for at least 10 years to ensure that your plan is tax-free. However, please bear in mind that tax treatment depends on your individual circumstances and tax law may change in future. There are plans that allow you to take the money out earlier if you need to but if you do, you may have to pay tax on the profits you make.
Keep an eye on your progress – It is important that you keep up to speed with how your money is performing. This is perhaps the easiest thing to do, but the thing people often forget. So when those statements come through your door, don’t just stuff them in a drawer. Take a while to properly read over them and see how your investment is growing and if you need to consider other options to meet your financial goals. Consider how much you will have at the end of the plan and if it meets with your expectations. You may also get a good feeling from saving or investing and feel a sense of achievement.
Read the small print and ask questions – Warren Buffet, arguably the greatest investor globally, always stuck to the mantra: “Never invest in a business you cannot understand.” Keeping this pragmatic advice in mind, you should make sure you check the small print for information on fees and that the savings or investment plan literature is clear and easy to understand. If you are interested in a plan, and you are still not 100% sure, you should consider picking up the phone or emailing in questions. Good financial services providers will be able to answer your question quickly and with clarity but cannot provide financial advice. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.
In conclusion, as Chris Hoy, Bradley Wiggins and Mark Cavendish strive for their goals on the global stage, we can learn a lot from their preparation and approaches to building a lead when it comes to saving and investing. Keep it regular and keep an eye on the goal and saving and investing becomes much easier.
For more information, why not take a look at the Why Save? section of the Scottish Friendly website.
References
[2] The ONS – http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product–preliminary-estimate/q2-2012/index.html
[3] Ernst & Young – http://www.ey.com/UK/en/Issues/Business-environment/Financial-markets-and-economy/ITEM—Forecast-headlines-and-projections
Popular questions and answers about Investing in an ISA
When it comes to saving and investing money, anyone interested in avoiding the taxman will have heard of the Individual Savings Account. Introduced in 1999, the ISA is a popular, useful way of generating returns within a tax-free wrapper. Many people think taking out and managing an ISA is complicated, but taking the time to familiarise yourself with the details can make the process a lot easier!
Read our list of important basic points for getting the most out of your ISA…
Q: What is an ISA?
A: Anyone who has savings or investments and wants to protect their money from the taxman may wish to consider an ISA. The money you place within your ISA is protected by a ‘tax-free wrapper’, which under current law exempts the account from income and capital gains tax (tax is deducted on UK share dividends). Remember, tax treatment depends on individual circumstances and tax law may change in the future.
You must remember that with any stock market related investments, your investments may fall as well as rise and you could get back less than you have paid in.
Q: How does an ISA work?
There are two different types of ISA: a ‘Cash’ ISA and a ‘Stocks and Shares’ ISA. The Cash category ISA acts like a normal savings account, except the interest you generate isn’t taxed and the money you put into a Cash ISA is secured.
A Stocks and Shares ISA is an investment product. The company managing your ISA will invest your money in the stock market – any returns generated on the growth of your money are protected from income and capital gains tax (remember tax is paid on UK share dividends). The Stocks and Shares ISA is an investment product. As with any stock market investment, your investments can fall as well as rise – there’s no guarantee you’ll get any return on your money and you could get back less than you have paid in.
Tax treatment depends on individual circumstances and tax law may change in the future.
Q: How much can I invest?
The current subscription limit for an ISA, annually, is £10,680. You can hold both Cash and Stocks and Shares ISAs simultaneously and you may split this amount over both accounts – although there is a cash limit, which stands at £5,340. If you wish, you may invest the entire amount in the Stocks and Shares ISA, but be aware that . The subscription limit doesn’t rollover – so if you have money you wish to save or invest, make sure you do so before the end of the tax year. Please remember, tax treatment depends on individual circumstances and tax law may change in the future.
Q: What kind of access to my money will I have with an ISA?
A: It’s a misconception that an ISA restricts access to your money for a pre-determined length of time. You should check the regulations for individual products but most ISAs will allow instant access to the money inside without losing tax benefits. If you do intend to access your money, it’s important to remember your subscription limit won’t change. You won’t be able to re-invest if you’ve maxed out your subscription limit. If you have invested or saved £1000 in your ISAs, you may generate returns and interest tax free – but you’ll only be able to contribute another £9,680 in that tax year. Tax treatment depends on individual circumstances and tax law may change in the future. Stock market investments may fall as well as rise and you could get back less than you have paid in.
Finding the right ISA product is important since you want your money to be working hard for you! Take the time to look through the products offered by different companies and consider your own savings and investment goals before you take the plunge.
Scottish Friendly has provided no advice in relation to these plans. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial advisor for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk Advisers may charge for providing such advice and should confirm any cost beforehand.
How to save or invest money tax-free
Saving and investing money is a way to encourage good financial practice and could provide peace of mind for any financial burdens – both expected and unexpected – that you may encounter in the future. Putting something aside regularly can help you prepare you for those big costs: towards your children’s education, medical expenses or even that post-retirement round-the-world trip you’ve been planning!
When you’re trying to save or invest, you’ve got enough to worry about without the taxman taking a chunk of your money. While tax is an important part of our financial system there are ways in which you can save and invest money and benefit from significant tax incentives.
Many savings and investment plans allow you to generate interest and returns exempt from tax – but it can be difficult selecting the right product for you. Take time to familiarise yourself, not only with the different plans on the market, but how each one will function over the short and long term.
Tax free means, under current law, free of income and capital gains tax except for tax on dividends from UK shares. Be aware that tax treatment depends on individual circumstances and tax law may change in the future. You must remember that with any stockmarket related investments, your investments may fall as well as rise and you could get back less than you have paid in.
Tax Free Savings and Investment Plans
You’ll find a variety of tax-free savings and investment plans on offer: each carries its own benefits and drawbacks. Most will require you to invest money regularly over a predetermined period of time (usually over ten years) – and in return, attempt to generate potential long-term growth and provide a tax-free lump sum at the end of that period.
Individual Savings Accounts (ISAs)
Individual Savings Accounts are a popular way of allowing your money to grow within a tax-free wrapper. Depending on your requirements and needs, you may take out a ‘cash’ or Stocks and Shares ISA or hold both simultaneously subject to the annual subscription limit. For the 2011/12-tax year the limit stands at £10,680 and up to £5,340 can be invested in a cash ISA.
Family Savings Plans
Saving and investing money doesn’t just have to be for you – you can get your whole family involved in preparing for the future with products designed specifically for families and plans that allow you to make investments for children. The tax-protection these plans offer often comes in addition to the allowances of any other tax-free plans (such as the ISA) you or other members of the family hold.
Get the Most from Your Savings or Investment Plan
Keep certain factors in mind before you choose a savings or investment plan…
- Subscription Limits: make sure you understand how much the savings or investment plan you’ve chosen allows you to put aside at any given time. Most savings or investment plans involve monthly contributions so it’s worth planning ahead. The ISA involves an annual subscription limit, which stands, at present, at £10,680 per tax year. You may share this amount over both a cash (up to £5,340 can be invested in a cash ISA) and stocks and shares ISA.
- Long-term investment: think about what your savings and investment goals are. Most savings or investment plans should be considered long-term strategies, which deliver their full potential over a pre-arranged period of time.
- Access: find out what kind of access you’ll be allowed to your money. While ISAs may allow a certain level of access, most tax-free savings and investment plans require you leave your money until the end of the plan or risk losing the tax benefits.
On a final note, it can be a good idea to use any kind of savings or investment plan to develop a regular savings habit. If you’re putting money aside regularly, you may find that the process quickly becomes a habit and can be a great way to get the most out of your tax-free savings and investment allowance. It’s never too early to begin investing for the future!
No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.