Need a bit clarification..

j11hnb

Hello,

New to all this savings malarky so I need a little bit of clarification here.

I have £5k in the bank just sitting doing absolutely nothing, so I'm gonna put it in an ISA. I can then afford to put £400 a month into an ISA after that. Where I'm getting confused is if I keep it all in the ISA and never take it out, in 10 years will I still be getting interest on all of the money that was in previously?
I know that there is a limit of how much money you can put in per year, but is there a catch where as I only get interest on the money that I have put in that year? Eg, I put £5k in, then in year 2 I keep putting £400 per month in, would I only earn interest on the £4800 I put in year 2, or would I get interest on the amount I put in in year 1 + 2 (£5k + £4.8k) and so on and so on.

Just I'm having a look here, and according to this calculator that I'm using after 10 years I will have £62,636.35. Is that correct? Or if not could someone let me know how much it would be etc and what the rules are.

John

alastair_h

j11hnb wrote: »

I have £5k in the bank just sitting doing absolutely nothing, so I'm gonna put it in an ISA. I can then afford to put £400 a month into an ISA after that. Where I'm getting confused is if I keep it all in the ISA and never take it out, in 10 years will I still be getting interest on all of the money that was in previously?

I'm guessing you are talking about a Cash ISA (not Stocks and Share). To use your 2010/11 allowance you can put up to £5,100 in to a cash ISA until 5th April 2011.

You would earn interest on the money you deposited and any interest earned (unless you opted to have the interest paid into another account) - compound interest.

From 6th April 2011 (2011/12 financial year) you can add a further £5,340 per financial year (until 5th April 2012), as the previous £5,100 limit is increasing.

j11hnb wrote: »

I know that there is a limit of how much money you can put in per year, but is there a catch where as I only get interest on the money that I have put in that year? Eg, I put £5k in, then in year 2 I keep putting £400 per month in, would I only earn interest on the £4800 I put in year 2, or would I get interest on the amount I put in in year 1 + 2 (£5k + £4.8k) and so on and so on.

As above depends if you withdrew the interest or let it compound up. You would earn interest on all monies deposited and any interest unless removed.

j11hnb wrote: »

Just I'm having a look here, and according to this calculator that I'm using after 10 years I will have £62,636.35. Is that correct? Or if not could someone let me know how much it would be etc and what the rules are. John

If you placed £5k in the first year and subsequently £4k8 for the following 9 years and let the interest compound up, assuming 3% interest fixed (which is around the best available at present) I calculate you would have just under £57k in 10 years. Also assuming it was in for the full tax year.

Consumerist

You can put £5,100 into a cash ISA using all of this year's ISA allowance if you open and fund the ISA by 5 April 2011. This £5,100 would earn interest for as long as it is in the ISA account.

The £400 per month would have to wait till after 6 April before it can go into an ISA. This could be either (a) the ISA you have already opened or (b) you can open another one.

According to the MSE Savings Calculator, if you put £400 per month into an ISA earning 3.00% AER throughout a 10-year period then it would be worth £55,916.77 if interest was paid into the ISA and no withdrawals were made. Again, the entire accumulated balance (from all years) would continue to earn interest for as long as the money is in the ISA account.

So, at the end of the tenth year you would, theoretically, have :-

£5,100 + £1,753.97 (10 years' interest at 3.00% AER throughout) + £55,916.77 (£400 per month for 10 years + 3.00% AER throughout).
i.e. £62,770.74 (in theory)

In practice, of course, interest rates will vary during the 10-year period and you will need to transfer the ISA(s) between different providers to get the best rate at any given time.