Investment Needn"t Be Taxing
Be in no doubt; the UK government's finances are in dire straits.
That's why, in the next few years, it'll be coming after more and more of your cash, demanding (often with menaces) that you pay for its stupidity and profligacy.
As far as government ministers and those pulling their strings are concerned, your role in all this is to sit quietly while they fleece you.
The recent rise in VAT from 17.
5% to 20% and the removal of middle class tax breaks was just the start.
I even heard on the news last week that HMRC has proposals on the drawing board to impose extra taxes, and then delay the rebates, on large chunks of people's redundancy payments.
It makes me wonder how they can get away with that sort of behaviour, but they can and they are.
How's that for sinister! ISA Tonic However, there's one tax break they haven't quite got round to removing yet, and that's ISAs or Individual Savings Accounts.
If you're currently saving outside an ISA wrapper, then that's the investment equivalent of leaving your front door open for any passing burglar to rob you (as I absent-mindedly did last year).
The government doesn't give us many free rides these days, but so far they seem to have a blind spot about what a good deal they're offering us on ISAs.
I'm sure it's only temporary, so the message is - don't look this particular gift horse in the mouth.
Grab it with both hands before they wake from their reverie and snatch it away like they have with all the other allowances.
If you don't invest the full amount allowable (£10,200) before the end of the tax year on 5th April then the tax break for this year will be gone forever and you can't claim it back retrospectively.
For those of you who are a bit hazy on the rules governing ISAs, there are two kinds - cash ISAs and stocks and shares ISAs.
You can split your ISA in two if you so wish, investing up to £5,100 in a cash ISA and up to £5,100 in a stocks and shares ISA, or, if you're feeling adventurous, you can wallop the full £10,200 into a stocks and shares ISA.
Unfortunately, one of the strange anomalies of the current ISA rules is that you can't invest the full £10, 200 into a cash ISA.
With cash ISAs, the advantages are clear-cut - no tax at all is payable on your interest.
So that's definitely worth having for starters, although do keep an eye on the rates paid by your bank or building society.
They have a nasty habit of tempting you in with a temporary 'bonus' and then slashing it a year later, hoping you won't be bothered to transfer to a better deal elsewhere - as you're fully entitled to do.
I'll just expand a bit on that last point - yes, you can transfer your ISA to another provider if you're not happy with the deal you're getting.
Just don't make the mistake of withdrawing the money before you transfer it.
Simply write to your new prospective ISA provider in advance, they'll send you a form and you fill it in with details of your current ISA provider.
Then send the completed form back to your new ISA provider.
They'll then contact your old provider and make the transfer on your behalf.
That way you can be sure that all the money will remain within the tax-efficient ISA wrapper.
Do be aware, though, that, the financial services industry being what it is, these transfers can take up to 6 weeks to complete.
This is far too long, of course, bearing in mind the amount of money the banks make from us and the poor service they so often provide.
As for stocks and shares ISAs, even if you're only a basic-rate taxpayer, you should still save within an ISA as, over the long-term, it's easy to build up a sizeable pot which, for non-ISA savers, would be subject to capital gains tax once you start cashing it in.
Moreover, any income you later decide to withdraw from a stocks and shares ISA isn't subject to tax and doesn't even have to be declared on your self-assessment tax form.
One of the misconceptions surrounding ISAs is that you can't have access to your money if you need it urgently as it will be tied up for years on end.
This is certainly not the case unless your ISA provider is offering you some kind of special deal where you agree to tie your money in over a certain period for a set return in the future.
All other things being equal, you can withdraw your money from an ISA at any time - but be aware that if you do withdraw the money you can't put it back into the ISA wrapper later in the same tax year.
Cash or stocks and shares? So having established the clear advantages of saving within an ISA wrapper the next question is: what sort of ISA should it be, cash or stocks and shares? Now that decision is, of course, heavily dependent on your personal financial circumstances.
If you haven't got much cash to splash, then a regular monthly savings plan in either a cash ISA or a stocks and shares ISA (or evenly split between both) might be the best idea.
For what it's worth, I tend to split the allowance.
I realise that, even with the tax-free interest offered by a cash ISA, the return on my cash will still fall behind inflation which, even according to understated and heavily massaged government figures, has already topped 5%.
However, even though my money will gradually be losing value in real terms, I feel still feel it's a good idea to park some money in cash as I expect stock markets to be particularly volatile this year.
What's more, If the market does take a violent dip later in the year, then there's nothing to stop me transferring some of the money in my cash ISA to my stocks and shares ISA to pick up a few bombed out bargains.
In fact, just to illustrate the point, that's precisely what I did last year.
Here's what happened: Stingy bankers After luring me in with an attractive deal a couple of years ago, my cash ISA provider (First Direct) suddenly went all stingy on me, offering a laughable return of 0.
2% p.
a.
Would they let me transfer to another better-paying cash ISA within their range? After all, 2% wasn't too much to ask, was it? You guessed it - having got me where they wanted me, they felt that they were the ones entitled to benefit from my tax-free allowance, not me.
Of course, they were hoping I'd think it was all too much hassle to transfer elsewhere.
Little did they know, they were really dealing with the Hands-On Investor in a cunning disguise.
In the end, I decided I didn't want to subsidise their next round of bonuses so transferred the cash to my stocks and shares ISA.
Yes, I know, I was taking on significantly more risk with this move, but I was getting reasonable returns from other cash accounts and felt comfortable with my overall cash buffer (as should you before you decide to invest in shares).
Anyway, 0.
2% was just beyond the pale when inflation is conservatively estimated at 5%.
So by now, you might just be wondering what shares I'd invested in.
Well with all the usual caveats about pride coming before a fall and markets going down as well as up etc.
I put half the cash into a US uranium and vanadium mining company called Denison Mines, and the other half into a US mobile phone infrastructure company called Ceragon Networks.
I invested in July 2010.
In the past 8 months, Ceragon Networks is up about 50% and Denison Mines is up about 200%.
Now I appreciate that I got a bit lucky here and these aren't the sort of risky shares that a typical UK investor should consider unless they're prepared for a potentially rocky ride.
I should add that the above is in no way a recommendation to buy these shares now, certainly not at such elevated prices, and my portfolio does contain many far more conservative investments.
Hands off, Mr.
Osborne! However, I highlight these returns not to brag (well only slightly), but to ram home the benefits of placing share investments into an ISA wrapper.
With returns of 50% and 200% in such a short space of time, I could quite easily have been approaching capital gains tax territory had I made these investments outside the ISA wrapper.
As it stands, the government can't touch a penny.
By the way, I know that I don't normally mention the sort of racy companies referred to above in my Hands-On portfolio as that's mostly aimed at more conservative first-time investors who want to be able to sleep at night.
Perhaps I'll consider launching a high-octane portfolio later in the year for those who fancy the occasional walk on the wild side.
So to wrap-up, I hope that I've managed to educate a few people here about the undoubted benefits of investing within an ISA and that you've generally found it an informative read.
Don't forget - get in there before the 5th April deadline.
If you do miss out, the one slight compensation is that next year's total allowance is rising to £10,680.
The Last laugh Before signing off it only remains for me to thank those tightwad bankers at First Direct from the bottom of my heart for encouraging me to abandon their comedy cash ISA.
I couldn't have made that 100% return without you guys!
That's why, in the next few years, it'll be coming after more and more of your cash, demanding (often with menaces) that you pay for its stupidity and profligacy.
As far as government ministers and those pulling their strings are concerned, your role in all this is to sit quietly while they fleece you.
The recent rise in VAT from 17.
5% to 20% and the removal of middle class tax breaks was just the start.
I even heard on the news last week that HMRC has proposals on the drawing board to impose extra taxes, and then delay the rebates, on large chunks of people's redundancy payments.
It makes me wonder how they can get away with that sort of behaviour, but they can and they are.
How's that for sinister! ISA Tonic However, there's one tax break they haven't quite got round to removing yet, and that's ISAs or Individual Savings Accounts.
If you're currently saving outside an ISA wrapper, then that's the investment equivalent of leaving your front door open for any passing burglar to rob you (as I absent-mindedly did last year).
The government doesn't give us many free rides these days, but so far they seem to have a blind spot about what a good deal they're offering us on ISAs.
I'm sure it's only temporary, so the message is - don't look this particular gift horse in the mouth.
Grab it with both hands before they wake from their reverie and snatch it away like they have with all the other allowances.
If you don't invest the full amount allowable (£10,200) before the end of the tax year on 5th April then the tax break for this year will be gone forever and you can't claim it back retrospectively.
For those of you who are a bit hazy on the rules governing ISAs, there are two kinds - cash ISAs and stocks and shares ISAs.
You can split your ISA in two if you so wish, investing up to £5,100 in a cash ISA and up to £5,100 in a stocks and shares ISA, or, if you're feeling adventurous, you can wallop the full £10,200 into a stocks and shares ISA.
Unfortunately, one of the strange anomalies of the current ISA rules is that you can't invest the full £10, 200 into a cash ISA.
With cash ISAs, the advantages are clear-cut - no tax at all is payable on your interest.
So that's definitely worth having for starters, although do keep an eye on the rates paid by your bank or building society.
They have a nasty habit of tempting you in with a temporary 'bonus' and then slashing it a year later, hoping you won't be bothered to transfer to a better deal elsewhere - as you're fully entitled to do.
I'll just expand a bit on that last point - yes, you can transfer your ISA to another provider if you're not happy with the deal you're getting.
Just don't make the mistake of withdrawing the money before you transfer it.
Simply write to your new prospective ISA provider in advance, they'll send you a form and you fill it in with details of your current ISA provider.
Then send the completed form back to your new ISA provider.
They'll then contact your old provider and make the transfer on your behalf.
That way you can be sure that all the money will remain within the tax-efficient ISA wrapper.
Do be aware, though, that, the financial services industry being what it is, these transfers can take up to 6 weeks to complete.
This is far too long, of course, bearing in mind the amount of money the banks make from us and the poor service they so often provide.
As for stocks and shares ISAs, even if you're only a basic-rate taxpayer, you should still save within an ISA as, over the long-term, it's easy to build up a sizeable pot which, for non-ISA savers, would be subject to capital gains tax once you start cashing it in.
Moreover, any income you later decide to withdraw from a stocks and shares ISA isn't subject to tax and doesn't even have to be declared on your self-assessment tax form.
One of the misconceptions surrounding ISAs is that you can't have access to your money if you need it urgently as it will be tied up for years on end.
This is certainly not the case unless your ISA provider is offering you some kind of special deal where you agree to tie your money in over a certain period for a set return in the future.
All other things being equal, you can withdraw your money from an ISA at any time - but be aware that if you do withdraw the money you can't put it back into the ISA wrapper later in the same tax year.
Cash or stocks and shares? So having established the clear advantages of saving within an ISA wrapper the next question is: what sort of ISA should it be, cash or stocks and shares? Now that decision is, of course, heavily dependent on your personal financial circumstances.
If you haven't got much cash to splash, then a regular monthly savings plan in either a cash ISA or a stocks and shares ISA (or evenly split between both) might be the best idea.
For what it's worth, I tend to split the allowance.
I realise that, even with the tax-free interest offered by a cash ISA, the return on my cash will still fall behind inflation which, even according to understated and heavily massaged government figures, has already topped 5%.
However, even though my money will gradually be losing value in real terms, I feel still feel it's a good idea to park some money in cash as I expect stock markets to be particularly volatile this year.
What's more, If the market does take a violent dip later in the year, then there's nothing to stop me transferring some of the money in my cash ISA to my stocks and shares ISA to pick up a few bombed out bargains.
In fact, just to illustrate the point, that's precisely what I did last year.
Here's what happened: Stingy bankers After luring me in with an attractive deal a couple of years ago, my cash ISA provider (First Direct) suddenly went all stingy on me, offering a laughable return of 0.
2% p.
a.
Would they let me transfer to another better-paying cash ISA within their range? After all, 2% wasn't too much to ask, was it? You guessed it - having got me where they wanted me, they felt that they were the ones entitled to benefit from my tax-free allowance, not me.
Of course, they were hoping I'd think it was all too much hassle to transfer elsewhere.
Little did they know, they were really dealing with the Hands-On Investor in a cunning disguise.
In the end, I decided I didn't want to subsidise their next round of bonuses so transferred the cash to my stocks and shares ISA.
Yes, I know, I was taking on significantly more risk with this move, but I was getting reasonable returns from other cash accounts and felt comfortable with my overall cash buffer (as should you before you decide to invest in shares).
Anyway, 0.
2% was just beyond the pale when inflation is conservatively estimated at 5%.
So by now, you might just be wondering what shares I'd invested in.
Well with all the usual caveats about pride coming before a fall and markets going down as well as up etc.
I put half the cash into a US uranium and vanadium mining company called Denison Mines, and the other half into a US mobile phone infrastructure company called Ceragon Networks.
I invested in July 2010.
In the past 8 months, Ceragon Networks is up about 50% and Denison Mines is up about 200%.
Now I appreciate that I got a bit lucky here and these aren't the sort of risky shares that a typical UK investor should consider unless they're prepared for a potentially rocky ride.
I should add that the above is in no way a recommendation to buy these shares now, certainly not at such elevated prices, and my portfolio does contain many far more conservative investments.
Hands off, Mr.
Osborne! However, I highlight these returns not to brag (well only slightly), but to ram home the benefits of placing share investments into an ISA wrapper.
With returns of 50% and 200% in such a short space of time, I could quite easily have been approaching capital gains tax territory had I made these investments outside the ISA wrapper.
As it stands, the government can't touch a penny.
By the way, I know that I don't normally mention the sort of racy companies referred to above in my Hands-On portfolio as that's mostly aimed at more conservative first-time investors who want to be able to sleep at night.
Perhaps I'll consider launching a high-octane portfolio later in the year for those who fancy the occasional walk on the wild side.
So to wrap-up, I hope that I've managed to educate a few people here about the undoubted benefits of investing within an ISA and that you've generally found it an informative read.
Don't forget - get in there before the 5th April deadline.
If you do miss out, the one slight compensation is that next year's total allowance is rising to £10,680.
The Last laugh Before signing off it only remains for me to thank those tightwad bankers at First Direct from the bottom of my heart for encouraging me to abandon their comedy cash ISA.
I couldn't have made that 100% return without you guys!
Source...