The ISA clock is ticking
This coming Sunday marks the end of the financial annus horribilis, which leaves savers only a few days to use up their 2008-2009 ISA allowance
The idea behind the ISA when it was launched by then-Chancellor Gordon Brown was to encourage individuals to save by allowing them to wrap up stocks, cash and insurance in one account. Placing investments in an ISA tax efficient “wrapper” means that any growth from an investment held within an ISA will not be liable for capital gains tax, and any interest gained from either cash or bond holdings within an ISA will not be liable for income tax.
The current total amount that can be placed in an ISA is £7,200. This can either all be invested in a stocks and shares ISA, or up to half the total amount - £3,600 – can be placed in a cash ISA. Only one cash ISA is allowed per financial year so if you want to save the full £7,200 anything you don't put in a cash ISA can be stored in a stocks and shares ISA. There is talk that the current financial downturn could spur now-Chancellor Alistair Darling to increase the annual limit in the upcoming Budget on April 22, with rumours suggesting a hike to a £10,000 limit could be on the cards. Note, however, that any increase announced later this month will not take affect until the following years. Still, with savers only allowed to open one stocks and shares ISA and/or one cash ISA per financial year, those wanting to catch the 2008-2009 investment period need to act fast.
Click here to see a comprehensive list of ISA funds, but beware that although April 5th is the official end of the tax year, some ISA deadlines fall before this date due to differing systems and ‘cooling off’ periods. With the deadline looming, banks and building societies are advertising their ISAs left, right and centre, while investment companies’ ISA push has hit something of a frenzy.
But why, you may ask, invest in an ISA when interest rates are at an all time low? Well, interest rates may well be at an all-time low, but according to figures from the Bank of England, the average interest paid on a cash ISA at end-February stood at just below 1%: a considerable drop on the previous year, granted, but higher than the BoE’s current rate of 0.5%. Furthermore, many of the best cash ISAs available at present offer rates above 3%, while corporate bond ISAs, which come with more risk, offer rates in the region of 4-5%. On top of this, it is widely forecast that interest rates won’t go any lower. What they will do, however, is start to move higher at some point and as a long-term and flexible savings plan an ISA can be an attractive way to watch your investments grow.
If you want to open or top up an ISA for the 2008-2009 year and are able to do this before the weekend, you can then open another ISA at the start of the 2009-2010 tax year on Monday.
