Reviewing Cash ISAs
Cash ISA rates may not be setting the world on fire at the moment, but that does not mean that you should walk away from ISAs altogether. If anything, it is the ideal time to review your ISAs, particularly if you hold significant monies in a cash account paying next to no interest. Decent returns can be found, particularly if you are willing to transfer and consolidate at least a part of your Cash ISAs into an Investment ISA (also know as a Stocks & Shares ISA).
What are the rules regarding transfers?
- Money held in a Cash ISA can be transferred into another cash account or into a Stocks & Shares ISA. Equally, assets held in a stocks & shares ISA can be switched back into cash should you so wish.
- You are only allowed to pay into one Cash ISA and one Stocks & Shares ISA per tax year. However, you can transfer ISAs between providers as often as you like – technically transfers do not count as paying in. Most providers will also allow you to make partial transfers if preferred.
- Be aware that some providers will charge interest penalties for transferring the money out early (usually fixed rate ISAs or notice accounts). It’s always important to check the small print.
- You should not withdraw the money you intend to transfer yourself. If requested, your old and new ISA provider will transfer the money between them.
Managing your ISA portfolio
Importantly, a Stocks & Shares ISA portfolio does not need to solely consist of direct holdings in Stocks & Shares. As advisers we help our clients put in place an actively managed service, where investment managers provide much needed expertise and guardianship over the ISA portfolio. Typically the investments will be collective funds and will be diversified across the main asset classes to help reduce overall risk. A portfolio can be targeted towards growth or income and can be altered to reflect your changing circumstances.
Investment Risk
You must, of course, be comfortable with the risks associated with investing in the stock market. It is well known that investments, their value and the income they provide, can go down as well as up and you might not get back what you originally invested.
As financial advisers we cannot remove all of the risk, but we can help our clients find an appropriate balance between risk and reward. Indeed, ISA investment portfolios do not automatically have to be high risk in nature. Obviously they are higher in risk than cash savings, but there are opportunities on offer for all risk profiles, cautious through to speculative.
Cash Liquidity
It is also worth bearing in mind that if you need to use or spend these savings in the short term, then you should keep your money in cash. We would only recommend investments for individuals with at least a five year time horizon.
Ultimately, you need to consider your overall objectives and circumstances before committing any cash savings to a medium to long term investment. We also recommend holding an emergency “rainy day” fund alongside your investment portfolio, for liquidity and security.
A Reminder: ISAs
Individual Savings Accounts, known as ISAs, offer a tax-efficient way to either save or invest. They benefit from generous tax breaks offered by the government to encourage you to put money aside. An ISA is not an investment in its own right; it’s more of a ‘wrapper’ to place around your portfolio or savings. The ‘wrapper’ helps shelter your savings and investments from tax. Every year each individual has an ISA allowance. This tax year the allowance is £20,000.
The tax benefits
- You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses.
- You pay no tax on capital gains arising on your ISA investments (equally, losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA).
- You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.
- Any UK resident aged 18 or over (16 for Cash ISAs) can invest in an ISA. There is no upper age limit and savings can be withdrawn whenever you choose.
Used properly, ISAs still offer the chance to create a substantial portfolio sheltered from the taxman, although remember tax rules can change, and the benefits will depend on personal circumstances. To request your own ISA review, please call 0203 6386 698 or email enquiry@lionmede.co.uk
The information in this article does not amount to personal advice. You are strongly advised to obtain specific, personal advice from an independent financial adviser about your own circumstances and not to rely on the information or comments in this article.