ISA Noob - Help....where to start???

UK_Don

Hi folks,

This is a horrible confession as a 30 year old man to be making on the MSE forums....but i have never had an ISA.

I'm trying to be a bit more financially responsible this year and I now understand the principles behind ISAs thanks to the excellent article on the MSE pages....namely tax free savings on a year to year basis. Lovely. :beer:

Myself and my Fiancee are both full time employed in good jobs, i own my flat and we are in the process of saving for a house that we will most likely buy once we are married next summer. I realise that my lack of ISA action means i have been missing out on £££ every year, and i'm determined to address that this year!

As a total ISA noob, where do i start with opening an isa for 2013?? From the MSE article it is clear that i can save £5640 per year tax free - no problems. I'll just pay a few hundred into it a month over the course of the year and claim the benefits come next April. My confusion lies over what happens once that year is up - Does the ISA just get ringfenced and i just open up a new one next year?

Also, when is the best time to open one up? Wait until the new tax year starts, or open it now?

In addition, someone mentioned to me that because i havent yet used up my ISA allocation for 2012, is it possible for me to open a new 2012 ISA now and just put a lump sum of £5640 into it and get 2-3% interest on it come the 6th April this year in a months time? Sounds too good to be true, surely??

If i do this, does it confuse my ISA allocation for next year or is it clearly distinguished as a separate entity?

I'm not overly fussed about stocks and savings ISA's so i'm looking to try and open a straight off savings account. I looked around on MSE and my head justabout exploded with all the options on offer. Especially when i hear that there are loads of new products coming up at teh moment.

I hope i havent sounded too thick but i appreciate that i have asked a lot of questions so please be gentle!

Thanks

UK_Don

Lokolo

- You have an ISA allowance each tax year (6th April -> 5th April)
- You can choose to use your ISA allowance in a new ISA or an existing ISA

You can open an ISA now and have £5640 to deposit up until April 5th. On April 6th you get a brand new alloance and you get to deposit a further X amount (I cannot remember what next years allowance is) into an existing ISA or you can open a new one elsewhere.

When to open one? The sooner you open one the sooner you start earning interest.

UK_Don

Thanks Lokolo!

Is interest calculated monthly or annually? IE - if i pay £5640 into one now, will i get interest based on the fact i've technically "saved" the full £5640 by means of an ISA over the course of the 2012 tax year, or would i just get one months interest paid?

Also, do i physically need to close each ISA year on year or do they just automatically shut?

Also, my G/F has a poor interest/easy access ISA right now (she's had it for years and never used/benefited from it) and she's now seen that they can be transferred to better ISA's. Likewise to the above, is it right to assume she could do this before the end of this tax year to benefit from this years allowance, and then open up an new one for the coming tax year? Is this a difficult process?

Thanks!

westy22

just put a lump sum of £5640 into it and get 2-3% interest on it come the 6th April

You will only get interest of approx 3% per annum on the balance in the ISA from the date you made the investment, calculated on a daily basis. You won't get 3% of £5,640 on the 6th April this year!

p00hsticks

UK_Don wrote: »

Hi folks,
Myself and my Fiancee are both full time employed in good. My confusion lies over what happens once that year is up - Does the ISA just get ringfenced and i just open up a new one next year?

Many (but not all) ISA s will let you keep adding each successive years Isa allowance into the same pot if you wish, or you can open a new one with a different provider each year.

UK_Don wrote: »

Hi folks,
Also, when is the best time to open one up? Wait until the new tax year starts, or open it now?

If you've money to put into it between now and the new tax year, open it now- if you wait until the new tax year, you've lost the opportunity to make use of this years allowance. But as a rule, the earlier in the tax year you get your money in, the more interest you earn (see below). And the best products tend to be offered at the start of the tax year as the financial institutions compete for your cash.

UK_Don wrote: »

In addition, someone mentioned to me that because i havent yet used up my ISA allocation for 2012, is it possible for me to open a new 2012 ISA now and just put a lump sum of £5640 into it and get 2-3% interest on it come the 6th April this year in a months time? Sounds too good to be true, surely??

As with all (most) savings accounts, interest will be calculated on a daily basis according to the amount in your account each day and paid out monthly or yearly according to the terms of the account. (You can't just put in a lump sum the day before interest is due to be paid and expect to get the same back as someone whose had that same amount lodged all year - it doesn't work like that !)

UK_Don wrote: »

If i do this, does it confuse my ISA allocation for next year or is it clearly distinguished as a separate entity?

As per the first response - some (instant access) ISAs will allow you to deposit (and withdraw money) at will, and you can continue adding to them over many tax years (if you wish). Others (usually fixed rate ones) will ask for a lump sum deposit that you can't add to, and that you are unable to withdraw money from for a fixed term (this is in return for a higher interest rate). If you opt for the latter you'd need to look for a new one each year. There are all sorts of 'flavours' of cash ISAs just as there are normal savings accounts - you pick one that suits your particular needs and wants.

p00hsticks

UK_Don wrote: »

Also, do i physically need to close each ISA year on year or do they just automatically shut?

You don't need to do anything (and they don't necessarily shut - as per my previous post, some you can continue to add successive years money to)

UK_Don wrote: »

Also, my G/F has a poor interest/easy access ISA right now (she's had it for years and never used/benefited from it) and she's now seen that they can be transferred to better ISA's. Likewise to the above, is it right to assume she could do this before the end of this tax year to benefit from this years allowance, and then open up an new one for the coming tax year? Is this a difficult process?

Yes she can transfer it this year - it's not difficult although it can take some time. She needs to shop around and find a new ISa she like the look of that will accept transfers in (not all do), and as part of the process of opening it, ask the new ISA provider to transfer the funds from her old ISA across. (the golden rule for transfers is NEVER to withdraw the funds yourself - always ask the new ISA provider to arrange it to avoid losing the tax free status).

UK_Don

Thanks P00hsticks - that is awesome!

Yeah i had a feeling the interest would be pro-rata'd depending on date of deposit - something didnt sit right with me when i heard that one!!!!

Final question (i think!!) - you see with this bit:

Many (but not all) ISA s will let you keep adding each successive years Isa allowance into the same pot if you wish, or you can open a new one with a different provider each year.

What happens to the interest with the carried-over balance? Say i pay in £5000 into my ISA one year, and the following year i keep it where it is and pay in another £5000 in...that that second years payments will earn me tax free interest, but what happens to the original £5000? Does it still accrue the same level of interest as per the ISA's rate? If so assume the interest on this first £5000 will now be taxable?

That being the case, its probably more beneficial to find a decent savings account to transfer the previous year's ISA balance into?

thumshie

UK_Don wrote: »

What happens to the interest with the carried-over balance? Say i pay in £5000 into my ISA one year, and the following year i keep it where it is and pay in another £5000 in...that that second years payments will earn me tax free interest, but what happens to the original £5000? Does it still accrue the same level of interest as per the ISA's rate? If so assume the interest on this first £5000 will now be taxable?

Interest is usually added to the ISA, and does not count as part of your deposit. This whole balance(deposit(s)+interest) will accrue interest at whatever tax free rate is applicable to the isa at that time. Some isa's drop the rate drastically after a year so you need to keep an eye on it..

UK_Don wrote: »

That being the case, its probably more beneficial to find a decent savings account to transfer the previous year's ISA balance into?

Nooooo. Once you remove money from an ISA you loose the tax benefit and can not replace it(without it accounting as part/all of your current years subscription). Some isa providers will allow you to 'transfer' an existing isa to them. Some of these do not require new money to be added,so if the interest rates drop you need to look for an isa with a better interest rate which allows transfers.

p00hsticks

UK_Don wrote: »

Does it still accrue the same level of interest as per the ISA's rate? If so assume the interest on this first £5000 will now be taxable?

That being the case, its probably more beneficial to find a decent savings account to transfer the previous year's ISA balance into?

No, as thumsie says, once moneys in the ISA pot, it stays in the ISA pot until you choose to withdraw it - and the interest is (usually) automatically put into the pot too and is in addition to your yearly allowance.

All earning interest tax free ! For those old enough and fortunate enough to have been able to put and leave the full allowance into Cash ISAs (and their TESSA predecessor) since their introduction, chances are that they will be getting several thousand pounds tax-free interest a year on their total ISA pot, which would stand at a six figure sum by now !