TIME ISA MONEY

In the words of that money saving guru, Martin Lewis, it’s crunch time.

The tax year ends on Thursday and if you haven’t used up your ISA allowance, quite frankly, you’re a bit of a mug. There are currently twenty-three million ISA accounts held in the UK. If you have savings you should consider joining them, before the shutters come down at midnight on April 5^th. 

Use it or lose it - there's still time to use your ISA allowance

Essentially, if you're getting a paltry rate of interest on your savings, the tax man will still want a slice of that interest. But stash that money away in an ISA and not only could you earn more interest (rates of up to 3.5% are on offer) but the tax man can’t get his grubby mitts on it. You, however still have access to the money because it needn’t be tied up for years. Seems a no-brainer to me. Little wonder that many people are treating ISAs as their new pensions.

Confession time. I realised today I hadn’t used my full ISA allowance for 2011/12. Everyone can invest £5340 in a cash ISA (that’s like a savings account with a set rate of tax-free interest) and £5340 in a stocks and shares ISA (where interest rates vary along with the vagaries of the stock market). I’d got the cash version but not the stocks and shares one. I asked myself why and had to admit it was probably because I understood the cash ISA more than the stocks and shares ISA.

Yes, I know I’ve written a book called Sheconomics. But I still have the same old blockers as most of you out there. And, as our behavioural change work shows, inertia is a very powerful force….

So I pulled out Sheconomics and re-read the bits about ISAs and, although the annual limits have gone up since we published in 2009, the same old advice holds true. It’s madness not to take advantage of this way of saving, to miss out on earning tax free interest. And you don’t even have to declare the interest on your tax return, making that onerous task easier too.

There's lots of free, useful and easy-to-understand info on-line

Next I set to and did a bit of internet research (bearing in mind advice in a previous blog from rplan to watch out for charges) and, with some help from Martin’s website above, found a Hargreaves Lansdown product that seemed to fit the bill. The HL form only took about 5 minutes to fill in and the information was easy to understand. Selecting a fund was a bit like sticking the tail on the donkey but their intro material had already provided some good guidance about safer and riskier options. 

My next step is to remind my husband to use up his allowance before midnight on Thursday. I’ve done the research for him so he’s got no excuses.

Then from Friday onwards, when the new tax year kicks off I can set up a regular ISA savings plan - most financial groups that run stocks and shares ISAs offer them. They allow you to smooth out the impact of fluctuations in share prices. The 2012/13 allowance goes up to £11,280 per person (all of which can go into a stocks and shares ISA or half into a cash ISA) meaning couples can save £22,560 and all the interest is theirs to keep.

Important ISA actions:

•     *  There’s still time to make the most of this year’s allowance - if you don’t USE IT you LOSE IT. 
•     *  You can open an ISA online or on the phone and most providers are open all weekend. 
•      *  Make sure you have your ID ready, know your National Insurance number and have access to the money you're investing (e.g. your debit card).
•      *  Don’t over-agonise about  your choice of cash ISA, just get one open. As long it doesn’t have transfer penalties you can always change later.

STOP PRESS: Check out Simonne's video on how to compare different cash ISAs.

Where’s a safe haven for your money?

Simonne gives some wise advice about savings:

We all want to sleep soundly knowing our money's safe....

The world’s stock markets continue to take up too many column inches, and it’s difficult not to worry about how your investments will weather the financial storm. 

So where do you stash your cash when there’s such turmoil the world over?

Investing in stocks and shares still makes sense if you’re happy to put away your money for the long term – in financial speak, that means at least 5 years, preferably longer. One approach to reduce the risk is to drip your money in over a period of months, rather than investing a lump sum and hoping for the best. If you’re worried about the recent turmoil in stock markets, watch this episode of Meaningful Money, with Pete Matthews offering sound advice.

But what if you don’t want to tie up your money for that long? 

Or you’re looking for less risk? Savings accounts are one way to go, but with interest rates so low what other options are there? Here’s are some:

Fixed Interest Savings Accounts If you’re prepared to tie up your cash savings for a fixed term like three, four or five years, you’re likely to get better returns than from ordinary instant-access savings accounts. The Money Advice Service offers some guidelines about getting the most from your savings accounts.

Social Lending This is a peer-to-peer arrangement, so you’ll be lending to individuals rather than to conventional institutions such as banks. The aim is to get a better rate than you would with a bank, but with that comes extra risk. The companies that manage this type of lending are not currently regulated by the Financial Services Authority (FSA) and your capital isn’t protected by the Financial Services Compensation Scheme, as it would be with an authorised firm. But there are methods used to control and minimise the risk to lenders. So you’ll need to weigh up the chance of a higher rate of interest with the increased risk and lower protection. Popular social lending sites include Zopa, RateSetter and Quakle. The Consumers Association, Which?, has a good review of some of the main social lending sites.

Inflation-proofed savings National Savings Certificates used to provide a guaranteed, tax-free interest above inflation and were in great demand, but sadly the door closed to new business early last month. Since then we’ve seen a few banks/building societies offering something similar, including the Post Office. But these accounts aren’t backed by the government and interest earned above inflation is taxable. However, if you hold no more than £85,000 in any one banking institution, your savings are protected by the Financial Services Compensation Scheme. And they offer a fixed rate of interest above inflation. The accounts currently available tie up your money for a fixed term. A good review of the current selection of savings accounts linked to inflation can be found on SavvyWoman, Sarah Pennell’s, website.

Regular savings accounts If you can commit to save a fixed amount for a fixed term - usually 12 months - there are better rates around, as much as 8% a year, compared to say 3% in a high-interest account. Savings may be limited to £250 per month, though, and you might not be able to access to your money for the whole fixed term. Moneysupermarket is one of a number of comparison sites, which help you weigh up different regular savings accounts currently on the market.

If you’ve got a lump sum of cash to deposit, you could make use of a regular savings account. Run one alongside a high interest savings account, making a monthly transfer from the high interest account to regular savings account, which should increase your overall return.

Structured products have increased in popularity since the credit crunch. They’re usually promoted as a safe way of investing money where you benefit from the upside of the stock market without risking the downside. Typically, your money is tied up for five or six years. At maturity, you get a proportion of the stock market return over that term, and your money back if the stock market has fallen. But be careful, and take time to read the small print. The ‘capital guarantee’ (the getting your money back bit) usually applies only if the market hasn’t fallen below a certain level. This means that if markets fall dramatically, you could lose a big chunk of your original investment. The product may also be backed by different organisations and if the sponsor goes bust, you could lose all your money. Moneyweek’s video warns about their risks.

If you want more advice on savings and some financial coaching, see Simonne's website.

Nifty bit of tax advice for high earners.

Simonne says:

High earners can avoid a 60% tax rate

There was a change in the Budget which some may not have noticed. Anyone earning more than £100,000 may effectively pay as much as 60% in tax because the personal allowance (the amount you can earn without paying any tax) is now gradually being snatched away for earnings in excess of that sum. Those earning £112,950 or more will lose their personal allowance completely, otherwise £1 is knocked off for every £2 earned between £100,000 and £112,950.

But the good news is that this can be avoided by making additional pension contributions. For example, if your taxable income is £105,000, by making a £5,000 pension contribution your taxable income would fall to the £100,000 threshold. At £100,000, your take home pay would be around £65,000 after tax and national insurance, compared to £67,000 with a £105,000 income. This  means that the £5,000 pension contribution would only have ended up costing you £2,000 -  in other words, worth 2.5 times more than the amount you invested. Pretty cool way to avoid extra tax!

Anyone who can work that out deserves to be paid at least £100k to my mind - Karen :o)

Budget 2010: Simonne's summary

Why does the Budget have to be as dull as dishwater?

One twitterer (is that a word?!) captured my sentiment in the following tweet:

"Alistair Darling has made as much of an impact as farting at thunder!".

There was lots to grab the headlines to keep most of the electorate sweet, unless you’re a cider drinking, chain- smoker buying a property worth over £1m!

From what I can see he played it really safe, not giving the Opposition any ammunition in the run-up to the election.

Anyhow, here’s a brief summary of some of the highlights:

· ISA allowances to increase in line with inflation from 2011 (maximum £10,200 from 6 April).

· 0% stamp duty threshold to rise from £125K to £250K for first time buyers.

· Stamp duty to rise from 4% to 5% for properties above £1m.

· Child tax credit to rise by £4 per week for one and two year olds from 2012.

· Cider duty to increase by 10% above inflation, compared to 2% for other alcohol and 1% on tobacco.

· A £2.5bn one-off growth package for small businesses, paid for from existing spending and banker bonus tax.

· No change on the amount you can inherit without paying inheritance tax.

· No change to capital gains tax other than reducing the tax rate to 10% for the first £2m of gains for entrepreneurs.

· Aiming to improve financial inclusion, by making sure everyone can have a basic bank account.

· Support for under 24s out of work for more than six months.

• Mortgage support for the unemployed for six more months.

Hope that was fun reading! Lots more available from the BBC website.

Thanks, Simonne, for summing up for us.

I'm off for some strong cider now...