Are ISA's ALWAYS the best option?

xrjtg

jingleberry wrote: »

Thanks for the quick reply. PLease let me check I understand. Income tax is payable on the dividends received by 'accumulation' funds even though they are reinvested in the fund.

Yes.

jingleberry wrote: »

If the fund is held outside an ISA, the tax is payable at the investors marginal rate. If held inside an ISA, the tax is limited to basic rate even for higher rate taxpayers. Is this correct?

Dividend income doesn't have any tax deducted, but HMRC pretend that it has been taxed at 10%, and give you a tax credit. They then tax a basic rate taxpayer 10%, which leaves you back where you started. Higher rate tax payers pay more. Inside an ISA the tax credit is just wasted, leaving you in the same position as a basic rate taxpayer with unwrapped investments.

jingleberry wrote: »

Supplementary question - does the tax treatment differ if the fund invests in fixed income bonds/ gilts?

Yes, these are taxed at your marginal rate outside of an ISA, but not at all inside an ISA. If you would hold them anyway, fixed income investments are often the best things to put inside your ISA wrapper.

King_Of_Bling

StevieJ wrote: »

If close to retirement ISA interest does not count towards the income limit for age related allowances.

Can you expand a little on this statement, i'm not near retirement and don't understand what this means.

jamesd

With 8% regular savers available it's usually not possible to beat them for those just starting to accumulate a savings pot even though they aren't in an ISA.

People who are aged 65 and then over 75 get a higher personal allowance for income tax. Those higher allowances are reduced gradually once taxable income exceeds £24,000. That creates a marginal tax rate of around 30% instead of 20% on that income. Income from ISAs does not count as taxable income so it has no effect on this calculation. The effect is to increase the interest rate that it takes for non-ISA savings to beat ISA ones. There are various other things like pension contributions and Gift Aid that also reduce the taxable income for this calculation.

cepheus

Another advantage of the ISA tax wrapper is that if you can build up quite a large sum all the interest remains free. Much of the gain will come though compound interest as well as the deposits. The Interest and gains may be enough to pay a flexible tax free lump sum or an income later in life.

At the moment however National savings interest linked certificates pay better than cash ISAs at about 5.5%. These can also be rolled over.

Both these products simplify the tax form as well, good enough reason in itself!

Naf

Thrugelmir wrote: »

Only if the after tax return is better on the savings product.

Always consider also that savings in an ISA now will continue to accrue interest tax free indefinitely, but if you accrue savings outside an ISA first, you will get to a point where not all of it can be deposited into your ISA at once even if you wanted to.
In addition, ISA interest rates, even instant access, are usually positioned better than their normal savings equivalents because the banks know that the money is less likely to leave, even though it is still kept instant access.
The flip side is that, as pointed out above, some regular savings accounts get much much higher rates, but tax will be deducted. You could opt to take advantage of these rates, then deposit it into an ISA as a lump sum once it matures and tie it up while you take further advantage of the regular saving rate the following year...

Ark_Welder

cepheus wrote: »

At the moment however National savings [STRIKE]interest [/STRIKE] indexed(?) linked certificates pay better than cash ISAs at about 5.5%.

..for the year that has passed. However, they may not pay as much for the year ahead.

cepheus

Ark welder

Yes, it's a shame you can't swap between NS&I and ISAs without loosing the allowance. However, I will make this point.

Whereas most people judge savings accounts by their interest rate, I believe they should always look at the rate relative to inflation.

I say you are taking a greater risk with most fixed bonds or interest sensitive bank accounts, than with NS&I Index linked certificates, since if inflation goes down the rate of increase of your outlay should (admittedly on average) go down.

In other words inflation should be the 'datum' to judge how the account is performing not zero.

atush

Savings 101.

first save 3-6 months spending in cash. higest interest possible for easy access. In an ISA if you earn enough to pay tax, and best acct if not a tax payer.

once this is done, you can opread out. If you work, does your empolyer have a pension? Do they pay into it for you (free money). If not, do yo hav a persnal pension? If your emplyer has a pesnison and pays into it, join it. If you are employed in public service and can join a Final salary scheme RUN TO JOIN it NOW!!

Next, think abut saving outside of cashand pension. Investments such as investment trust savings plans, S&S ISAs, UT/OEICS or more cash savings but perhaps longer term fixed rates such as NSI ilscs.

jingleberry

Thanks to xrjtg for your 5.26pm post today

Ark_Welder

cepheus wrote: »

I say you are taking a greater risk with most fixed bonds or interest sensitive bank accounts, than with NS&I Index linked certificates, since if inflation goes down the rate of increase of your outlay should (admittedly on average) go down.

In other words inflation should be the 'datum' to judge how the account is performing not zero.

Which is why I keep a fair chunk of my cash in IL certificates.

But remember that at some point interest rates will revert to more normal levels - which should be higher that the rate of inflation - so the risk then will be that better returns are available elsewhere and are being missed.

But I will still keep my existing IL's because I think of them as 'insurance'.