basic ISA questions for a newbie who hasnt a clue

showmethemoneyuk

I was given an ISA by the RBS after asking the teller for a basic second account to save money into, given no info on exactly how an ISA actually works! Its only now, beginning to work out what one actually is (I think), and that I believe this probably wasnt the best choice at all. I was given an "easy access ISA account" with no tax on interest. After reading up via the net on ISAs, this didnt make any sense at all at first, since I did not receive any interest upon checking my statements regulary, until I discovered that interest would only be given once a year (at the end of march through this bank, which is supposedly just before the end of the tax yr). I understand that banks may all have their own individual rules, eg how much in total you can put in, with differing % on how much interest you get back at the end of the tax year date. Im just looking after the basic reasons as to why certain things happen, or what I have wrong posted on here-there are plenty of sites detailing how to make the most of one, ie make the most interest, but with no real reasons as to why any of it happens-are ISAs mainly only used for this tax-free service? Im sure there is probably some confusion in what Ive posted above (and below)! :-

An ISA to me just sounds like some sort of legal workaround from the taxman, in order to make the most interest that is given at the end of the march, and nothing else-with its main drawback being that if I dont take the entire amount out before the end of the tax year (early april), that I will always lose the entire amount-is this true? It doesnt sound like a safe system if I can lose money in this manner by leaving it in too long.

If I keep transferring money to and from the ISA in the same tax yr, can this lower the amount of interest that I get back?

Since the interest is annual with the RBS, can I simply put the entire amount in just before the date I receive interest, and then take it out before the end of the tax year date, or does the amount of interest earned also depend on how long your ISA savings have been in this account?

thanks for any further info or links

blueberrypie

ISAs are indeed a way to save and earn interest without having to pay tax on it. However there are some things you've completely misunderstood. I'll try to clear those up.

You get paid interest once a year, but it's worked out on the basis of how much was in the account each day. So if you had £1000 in the account for six months, and it was paying 3% interest, you'd get half of 3% of £1000 (because you had the money in there for half a year). This is how all savings accounts work - when the interest is paid isn't relevant.

If you were to take the money out of an instant-access ISA at any point before the interest was paid out, you'd still get interest on the money that was in there for as long as it was in there. If you closed the account completely before the interest was paid, the interest due up to that date would be worked out and paid to you on the account closure.

You don't lose the money at the end of the tax year - I think you've perhaps become confused by people talking about "losing your ISA allowance"? This is because each year there is a maximum amount you can pay into an ISA - this is your "ISA allowance". If you don't use this allowance, once the tax year finishes, you can't then use it - in other words, you can't say "well I didn't pay any money in during the 09/10 tax year so I'm going to pay extra in this year". But this does not mean you lose any money! The money will still be in the ISA that you paid into, along with any interest it earned.

If you transfer your ISA to a different ISA provider, you can lose interest, because the money is between accounts for a few days. Some providers now pay interest from the date they receive your transfer form, which means you don't lose any interest because of the transfer.

You can't put in funds just before the interest payment date and get the full interest on the full amount. The interest is based on the balance at the end of every day through the year, not on the balance on a particular date.

You can probably get a higher interest rate on your money than you are earning in the RBS Easy Access ISA - but make sure you understand about ISAs, and once you're happy with that, you can work out the best place for your money.

I hope that has helped. If you've more questions, do ask. It's a good thing to understand what's going on with your own money :-)

psychic_teabag

showmethemoneyuk wrote: »

If I keep transferring money to and from the ISA in the same tax yr, can this lower the amount of interest that I get back?

Note that the rules are drafted such that each time you pay into the account, it counts against your allowance. Taking it out doesn't cancel that. So paying in £1000, then taking it out, then putting it back in again means you have used £2000 of your annual allowance, even though the balance is only £1000. It won't affect you if you are only moving a few pounds around, and your balance is well below the annual allowance (around £5000), but it is something you ought to be aware of.

david78

I was going to answer, but had to nip to the shops. And now I'm back I can see you have an excellent answer from blueberrypie, so I don't need to say anything more. Thanks blueberrypie.

itzmee

I too have some questions if no-one minds as I am also new to ISAs. I opened my first one last August with Nationwide (e-ISA). It pays a bonus up until June 2011.

Now what confuses me is when will I get interest as the bonus is paid up to a few months after the tax year ends - will I get it in June with the bonus or will I get some by the end of the tax year.

Does the ISA expire in April or June?

Does it expire at all or can I continue paying into the ISA during the new tax year (starting my new allowance for the year) or do I have to open a new account. If I can carry on will I still get interest on the whole amount or just for the latest year's allowance?

Sorry if I sound a bit dim but I just don't understand ISAs!

Lokolo_2

itzmee wrote: »

I too have some questions if no-one minds as I am also new to ISAs. I opened my first one last August with Nationwide (e-ISA). It pays a bonus up until June 2011.

Now what confuses me is when will I get interest as the bonus is paid up to a few months after the tax year ends - will I get it in June with the bonus or will I get some by the end of the tax year.

Does the ISA expire in April or June?

Does it expire at all or can I continue paying into the ISA during the new tax year (starting my new allowance for the year) or do I have to open a new account. If I can carry on will I still get interest on the whole amount or just for the latest year's allowance?

Sorry if I sound a bit dim but I just don't understand ISAs!

1) When you get interest will depend on the specific terms of the ISA, most providers pay intrest annually on a specific date, I know that doesn't help much but you might need to give them a ring or refer to any documentation you got when opening it.

2) ISA's never "expire", the only thing that will expire is the bonus rate, so if you don't transfer your ISA then you will end up earning a poor rate of intrest from June when the bonus ends.
Sometimes ISA's also become dormant if you don't pay into them for a long time but that just means you need to re-activate it!

You get an annual allowance to put into a Cash ISA each tax year, this expires on April 5th so if you haven't used it up then you'll lose the chance when we hit the next tax year, but you'll be able to deposit a further £5340 during the next tax year.

You get intrest paid on the whole amount, but it will be calculated daily and probably paid annually.

You can open a new ISA next tax year if you find one offering a better rate than your current one for example, Santander's 3.3% or The AA's 3.35%. :j

dtsazza

itzmee wrote: »

Now what confuses me is when will I get interest as the bonus is paid up to a few months after the tax year ends - will I get it in June with the bonus or will I get some by the end of the tax year.

I'll assume that your ISA pays interest yearly, as most do. Then every evening, the interest for that day is calculated as (current interest rate / 365) * balance. Note this is just the calculation - the sum of all these daily payments is put into the account yearly (or when you close the account). With your bonus rate finishing in June, all this means is that the daily calculations for this "accrued" interest will start using the lower rate from that point on.

So if your ISA pays 3.65% at its bonus rate, that's 0.01% of the balance every day. Stick £1000 in there, and every day 10p interest builds up towards what you'll get at the end of the year. When the bonus period finishes and the rate drops (say, to half as much), every day from then on you'll accrue 5p towards your end-of-year payment. All of these payments count in the end, so at the end of the year you'll get an amount that's equivalent to about 6-7p/day (depending on exactly when the rate switched over).

Does the ISA expire in April or June?

The ISA, as an account, won't expire. Legal restrictions on the ISA limit the amount that you can contribute (i.e. pay in) within each tax year - so this contribution window runs from 6 April - 5 April the next year. If you "miss" the ISA deadline then your allowance for that year is unused, though you can still contribute funds - they'll just count towards the next year's allowance.

Most if not all banks allow you to have multiple years allowances within the same account. The fact that people talk about "a 2008-9 ISA" vs "a 2009-10 ISA" is mildly misleading; they're talking about the allowances rather than separate physical accounts in most cases. (Though often because banks change in competitiveness, the best buy for one year isn't always the same so of course it's not uncommon for someone to have decided to open up a separate account in later years).

Sorry if I sound a bit dim but I just don't understand ISAs!

Don't worry, they can seem quite daunting at first. I realised after a while that they're not that bad, once you grasp that the only real rule is that you can only contribute a certain amount each tax year (currently £5,100), and this must go to the same ISA. Withdrawals don't reduce this limit and remove that money from its tax-free status forever. You can transfer your ISA between providers too, if your current one is uncompetitive.

It seems like it's only about the contributions/year limit - all the rest is details...

showmethemoneyuk

yes, after googling up on the subject before, I think I was getting confused as some people were often stating that they would "lose their money" at the end of the year - they may have been referring to not using all of their allowance/the possibility of losing interest. Perhaps to them this interest was paid around the same time as the end of the actual year, or tax year, but after that it made no sense until now. I hope this all makes sense! after that I just had no idea how it all worked. thanks to everyones replies - thats cleared up a lot!