Lowdown on ISAs

In this, the first episode, Clare tackles the subject of ISAs. They’re now more flexible than ever, but in recent years, with the personal savings allowance and tax-free dividend allowance offering attractive non-ISA tax savings, are the perks of the Individual Savings Account still worthwhile? Clare gives the lowdown on just what an ISA can offer you in 2017-18.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

Hello, I'm Clare, and welcome to Smart Investor the show the lifts the veil on personal investments. Uncloaking the process of investing, demystifying the jargon and giving you the confidence to become a savvy and discerning investor, making much better use of your money.

Over the coming months I'm going to be sharing the know-how and expertise that I've picked up over my 16 years as a financial journalist and we'll be speaking to people just like you about their investment aims and goals as well as some top experts to equip you with the latest insight. Although we can't offer personal advice, we'd love to hear from you so if you've got any questions or tips you'd like to share let us know via our Facebook page. And, as ever, if you're unsure about investing please seek independent financial advice.

Today I'm going to be giving you the low-down on one of the most popular investment vehicles the Individual Savings Account or ISA. ISAs offer a way of sheltering the returns you make on savings and investments from tax. However, recent changes have led some to question whether or not they're still worthwhile. You may have heard about the personal savings allowance that was introduced by the government in April 2016 which means that most UK savers are no longer taxed on the interest they earn on their cash savings. At the same time, a tax-free dividend allowance of £5,000 was introduced, benefiting those with stock market investments. And this is in addition to the annual capital gains tax allowance that we all get here in the UK.

However, despite these new allowances ISAs are still worth considering because as your savings and investment portfolios grow you may find your annual returns exceed the allowances meaning you could still be liable for tax. Remember, interest, dividends and capital gains derived within an ISA are tax free.
You can put up to £15,240 into an ISA in the 2016-17 tax year rising to £20,000 in 2017-18. So if you're able to take advantage of your ISA allowance each year you could potentially build up a significant amount of tax-free money.

It's important to bear in mind, though that tax rules may change in the future and their effects depend on your individual circumstances which may change over time too. In addition to the tax benefits of ISAs the rules around how they work have also become a lot more flexible over recent years. For example, if you already have money in a cash ISA you can move it into an investment ISA and vice versa. You can also take money out of an ISA and put it back in without it affecting your annual allowance as long as the ISA is flexible and it's within the same tax year.

Investment ISAs allow you to hold a wide range of investments such as funds, shares and bonds and over the long term, stock market investments have the potential to produce higher returns than cash so with interest rates at historic lows an investment ISA could therefore be well worth considering. However, it's important to be aware that there is risk involved as the value of your investment ISA could fall as well as rise so you could get back less than you invest.

That said, if you're prepared to stay invested for the long term typically at least five years, you have a greater chance of riding out the inevitable ups and downs of the market and coming out the other side with your portfolio in the green though this is never guaranteed.

Finally, if you don't make use of your annual ISA allowance it'll be gone for good once the next tax year starts. It can't be carried over to the following year so if you don't use it you'll lose it. For more information on ISAs, check out our website. Thanks for joining me today and I look forward to seeing you again next time on Smart Investor.

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