The Goods and Bads of ISA's Article

The Pros

1. It's tax free

Putting your money in an ISA means that you will not be required to pay tax on your savings. This can be particularly beneficial if you are a higher-rate tax payer as you do not have to pay income tax or capital gains tax.

2. Easy access

Unless you tie your money up in a 'fixed rate' (or 'fixed term') or 'notice account' ISA, withdrawing money should be a simple process. While you will not be able to withdraw cash from your ISA using a debit card or ATM machine, you are free to transfer money into an instant access account (such as a current account) and access it through this method. It may take several working days before you can actually use the transferred money, but it may be quicker if you use online banking and are transferring money between accounts at the same bank.

The Cons

1. Limited deposits

You are restricted to depositing either ?3,600 (for a cash ISA) or ?7,200 (for a stocks and shares ISA) per tax year. For those aged over 50, this rises to ?5,100 (for a cash ISA) or ?10,200 (for a stocks and shares ISA), and this will apply to all savers from April 2010. Only one cash ISA and one stocks and shares ISA can be opened per tax year. Each tax year begins in April and runs through to the following April. Once you have gone over your yearly allowance, you will be unable to pay in any more money. If the first ?3,600 is invested in a cash ISA, the remaining amount of your personal allowance must then go into the stocks and shares ISA. Alternatively, you can invest the whole of your personal allowance into a stocks and shares ISA.

2. Withdrawals affect deposits

Many people are unaware that withdrawals affect the amount of money that can be paid into an ISA during the typical tax year. Theoretically, you are allowed to deposit up to ?3,600 per tax year, but this changes if you make withdrawals. For example, if you deposit ?2,000 into your cash ISA but withdraw ?600 in the same tax year, you might expect to have ?2,200 left as your ISA allowance (given that your 'net' deposit is ?1,400). In reality, you will still only have ?1,600 left as your ISA allowance as you cannot increase your personal allowance to account for withdrawals.

3. Low interest rates

The typical cash ISA has interest rates that are far inferior to the likes of 'regular saver' accounts, and the best rates are generally reserved for the 'fixed rate' ISAs that require you to tie your money up for one to five years to secure a favorable rate of interest. As many people are understandably reluctant to tie their money up for several years, these are an unattractive option at the moment. Beware of introductory interest rates that fall to less than 1% once the bonus period is over. If you want to take advantage of these offers, remember to switch your money to another account once the bonus period ends to avoid being saddled with a poor interest rate.

Article Source: http://www.mycontentbuilder.com

Kasandra Dunphe has been saving into an ISA for several years.

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