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Annual ISA allowance goes up to £7,200 a year

by The Investor on April 7, 2008

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This is the first in my special five-part series entitled Five big boring tax changes that will make you richer or poorer in 2008/09. For the others, please see the introduction to the series.

From April 6th 2008, ISA rules for UK residents change as follows:

  • Your annual total ISA allowance rises to £7,200, and the stupid ‘maxi’ and ‘mini’ ISA distinction is abolished.
  • Instead, you can get a cash ISA and/or a Stocks & Shares ISA.
  • You can invest from £0 to £3,600 in a cash ISA during the year, and the balance (up to your total of £7,200) into a Stocks & Shares ISA.
  • Personal Equity Plans (PEPs) held from the 1990s are reclassified as Stocks & Shares ISAs.
  • You will be able to convert cash ISAs into Stocks & Shares ISAs in the future, but not vice-versa.

Why you should use ISAs to save tax

ISAs (Individual Savings Accounts) are a UK investor’s best friend – arguably better than personal pensions. You can hold loads of different types of assets in them, including shares, cash, investment trusts, unit trusts, and bond funds, and you don’t have to pay extra tax on the income you receive in them. Nor do you pay on capital gains on investments held in an ISA when you sell.

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Your ultimate guide to UK savings

by The Investor on November 20, 2007

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Cash is the safest place for your money in the short-term.

Sounds obvious, but cash is money. Shares, property, bonds, gold and pension funds are all assets whose value constantly fluctuates according to the whims of their markets. You can only be certain what such assets are worth when you come to sell them.

In sharp contrast, while the real value of a £20 note will go down due to inflation over the long-term, short-term it’s the safest store of value there is. You know it’s worth exactly… £20.

The price for this safety is you can expect lower returns from cash compared to investing in shares, over periods of five years or more.

Note that I’m talking here about keeping the interest you receive in the savings account, to benefit from compound interest over time.

If instead you spend the interest you receive, the real value of your savings will go down with inflation. Right now that would mean your cash would lose 3-4% of its spending power every year.

Despite the low returns, everyone needs some cash stashed away for a rainy day – or more specifically for when the roof leaks and you need to get it repaired.

You’ll also want cash savings for near-term known expenditure, such as school fees or a house deposit. You don’t want to lose your dream home because the stock market happens to be having a bad month when you come to buy, for example.

You might also keep some proportion of your long-term investment money in cash, depending on your views on the stock market, and increase the proportion in cash savings if you’re feeling very gloomy.

Just remember, over time you risk losing out to inflation, so you really want your long-term money in assets like shares or property.

Cash savings are the simplest of investments, but there’s still plenty to cover. Let’s get going.

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