Yahoo Finance How to open or transfer an ISA for the new financial year
With the end of another tax year approaching on April 5, time is running out to set up, contribute to, or transfer between an Individual Savings Account (ISA) for 2021/22.
ISAs can be a tax efficient way to save money, particularly for those willing to invest or people with a large amount of savings.
Here we explain what to consider when putting money into an ISA.
What is an ISA?
Everyone over the age of 18 can save £20,000 per tax year into an ISA tax free. This can be placed into one type of ISA or split between the four different types. But you can only have one of each type in each tax year.
The best known ISA is cash and it operates like a savings account. A cash ISA can be easy access or fixed term where money is locked away for a period of time.
A stocks and shares ISA, sometimes referred to as an investment ISA, is where you invest your money in funds or shares. This has higher risks but potentially higher returns.
A Lifetime ISA is for people aged 18 to 40 and can only be used to buy a first property or for retirement. You can save a maximum of £4,000 per year until the age of 50 and the government gives you a 25% bonus on top.
The fourth, lesser known ISA, is an Innovative Finance ISA where you invest in peer to peer loans such as lending money to businesses or into property, rather than on the stock market.
Separate to these ISAs is the Junior ISA which does not count towards the £20,000 individual allowance. A Junior ISA can have a maximum of £9,000 per child, per year and anyone can contribute to it. The child cannot access the money until they are 18.
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What type should I get?
The first question to ask is do you actually need an ISA or would a high interest savings account be better?
"Cash ISAs have become slightly less popular in recent years because since 2016 everyone has had a personal savings allowance anyway, so you don't have to pay tax in any account. Only higher earners need a cash ISA," explained Caroline HughesCEO of personal finance app Lifetise.
The savings allowance means that basic tax rate payers can earn £1,000 in interest on their savings tax-free. This drops to £500 for higher rate taxpayers. With interest rates being so low a basic tax rate payer would need more than £100,000 in savings to be earning £1,000 interest per year.
"A lower tax payer is better off looking for a high interest savings account. You can get a better rate of interest with a non ISA savings account and then move to an ISA just before the closing date on April 5," said Hughes.
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If you are willing to take a risk and don't need easy access to your savings then a Stocks and Shares ISA is a good medium to long term investment. This is particularly the case with the Lifetime ISA, if you want to save for a first home deposit or are self employed and want to save for retirement.
'Shares have historically offered higher returns over long time periods, albeit the price for that is spells of short-term volatility that can put capital at risk should it be needed back quickly. The trick is to make sure money is only committed into the stock market that will not be needed back over a short time horizon of less than five to 10 years," said Tim Bennett, head of education at investment firm Killik & Co.
But it is important to remember that a pension is best for retirement if you are employed because the employer contributions and tax benefits are greater than an ISA.
Meanwhile an Innovative Finance ISA is set up for people who have prior experience in investing.
How do I open one?
It is easy to open an ISA online or for regional products in branch. But it may be better to wait until very close to the deadline when providers put out their best deals to entice customers at the last minute.
Some ISAs can be opened for as little as £1 whilst others ask for a minimum of £500. Each product will have a different set of restrictions such as whether they allow lump sums, monthly contributions or a set number of contributions a year.
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How do I transfer my current ISA?
Transferring an ISA is slightly more tricky because you have to follow the formal ISA transfer process rather than withdraw the money yourself and open a new account to put it into. If you transfer it yourself the tax protection is lost.
You can transfer an ISA at any time to the same type of ISA with another provider or to a different type of ISA – as long as you don't already have one.
In order to transfer you need to contact your ISA provider and ask them to do it.
There are different rules depending on if you're transferring an ISA that you've opened during the current tax year or a historic ISA. If it is the current tax year you must transfer the whole thing but if the ISA is from a previous tax year you can choose how much to transfer.
Check if there are any charges or fees you need to pay on transfer out such as platform or management fees on Stocks and Shares ISA that get cashed out to transfer, or if you have a fixed-term ISA with early exit fees.
Transfer can take up to 15 working days for Cash ISAs but may be longer if you have stocks and share to sell.
It is also possible to withdraw money from your ISA at any time but there may be withdrawal fees. You can't pay in more than £20,000 in any tax year, but most products will allow you to take money out and then pay money back in as you wish throughout the year up to the £20,000 ceiling before the 5 April deadline.
