(PRWeb UK) March 22, 2010
Despite being in its 11th year, it seems that the British public has still not fully grasped what they could be missing out on when it comes to the tax advantages offered by ISAs, according to research* conducted on behalf of Fidelity International.
The survey showed that while as many as 93% of people knew that there was some sort of tax advantage to an ISA, only 5% felt they fully understood what this meant; 7% thought there were no tax advantages associated with an ISA at all.
Paul Kennedy, Director of Tax & Trust Planning at Fidelity International said: “It seems clear that whilst people recognise that they should do an ISA, they’re still a little in the dark on why it makes so much sense. What is really worrying is despite the fact that many millions of people do take out ISAs; many millions more may still be missing out and literally throwing their hard earned money away to the taxman. I believe there are a few key reasons why some people still remain confused.”
1) Failure to separate the ISA wrapper from the investment
Many people perhaps still think of an ISA as an investment in itself. It is not…an ISA is nothing more or nothing less than a simple ‘tax shield’ you put around your savings and investments, whatever they may be. Ordinarily, when people’s savings produce interest or dividends or just simply grow in value, the taxman is going to take a portion of that from them. By putting their savings in an ISA, they stop the taxman taking a slug and they’ll get more back. An ISA is not about taking more risk with your money, it’s not about taking less risk it is simply about first deciding in what you want to save or invest and then putting the ISA wrapper around it to keep the taxman at bay. You can put money in and take it out whenever you want and you do not even have to tell your HMRC office that you have an ISA.
2) Possible confusion over phrases like ‘tax advantageous’ and ‘tax efficient’
Since the Government ceased paying the additional tax credit for stocks & shares ISAs in 2004, ISAs have tended to be promoted as ‘tax advantageous’ or ‘tax efficient’. These terms don’t perhaps really convey the true worth of the ISA. Whilst they express the ISA to be in some way beneficial, they rather play down the true ‘tax-free’ status. Put simply, if you save in an ISA you are entitled to keep all that you receive from that investment and not pay any tax on it. If your investments pay interest, that’s tax-free. If they pay dividends those are tax-free and any capital growth is also tax free. Investment returns from ISAs are free of all personal UK tax…full stop. If this point is fully understood then the saver can easily work out what tax they have to pay on their investments outside an ISA and instantly see the tax that would be saved by using an ISA. They would also better understand how the tax they are saving can be different depending on whether the investments are producing interest, dividends or capital growth.
3) Cash ISAs v. investment fund ISAs
Cash ISAs tend to operate in a slightly different way from investment fund ISAs. With a cash ISA, you can’t just pick the very best deposit account on offer and then tell the operator to put an ISA wrapper around it to get the interest tax-free. Instead, you can only buy deposit accounts that are sold specifically as ISA accounts. This does allow operators to set different interest rates for ISA accounts and non-ISA accounts and there has been some criticism of late that ISA deposit rates are being kept deliberately low compared to non-ISAs accounts. Investors have no choice, it’s take the ISA account or nothing. It’s generally the case that even with a lower rate, once the tax-free interest is taken into account, you’re still going to better off than using a better paying non-ISA account but some see this as operators getting away with lower rates, simply because they can.
With investment funds, there tends not to be a specific ISA fund and a non-ISA fund. Normally, there is just one fund and here you are simply instructing the fund manager to put an ISA ‘hat’ on your fund, to start receiving the tax advantages. Effectively, the very best funds are available in exactly the same way, whether ‘tax-free’ inside an ISA or ‘tax-payable’ outside an ISA and there is no discrimination. If fact, quite often you may be able to buy the fund cheaper when doing so through an ISA.
Kennedy continued: “Quite simply, if you have savings, you absolutely must consider an ISA. If you pay tax, an ISA should be the first place that any non-pensions savings go. If you have existing money saved or invested outside an ISA, never…never…unless there are very good reasons, let a tax year pass without using your ISA allowance. We have stacks of information explaining how ISA work on our website, if anyone is in any doubt, please take a look to see just how important - yet easy, ISAs really are. ”
- ENDS -
Notes to editors:
*Research conducted by Opinium Research, online survey of 2,000 people (nationally representative) between the 24th to 28th September 09. http://www.opinium.co.uk
FIL Limited (“FIL”) and its subsidiary companies serve the major markets of the world by providing investment products and services to individuals and institutional investors outside the US. Any opinions expressed are made at the time of writing and can be subject to change without notification.
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