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Last minute tips: all you need to know about ISAs
With the deadline for 2012/13 ISAs only a day away, Blue & Green Tomorrow is on hand with some last minute information into the ethical options.
ISAs, or individual savings accounts, essentially allow you to save money without offloading a portion to the taxman. If you’ve got a sweet tooth, Martin Lewis, founder of MoneySavingExpert.com describes ISAs using a handy cake analogy here.
A typical savings account or investment (Lewis’ cake) is subject to the taxman taking his cut. Depending on what tax bracket you’re in, the tax you pay on the interest varies.
ISAs are often described as a ‘wrapper’ that allows a limited yearly allowance of money to be protected (Lewis’ cling film) from the taxman. So, if you have any savings at all, an ISA is the first port of call.
There are two types: the cash ISA and the equity (stocks and shares) ISA.
If you feel a little lost already, don’t worry because you’re not alone. The now-defunct Financial Services Authority found that “40% of people who own an equity ISA are not aware that its value fluctuates with stock market performance, and 15% of people who own a cash ISA think its value does”(which it does not).
Cash ISA – safe and steady
Cash ISAs are similar to a normal savings account, except any interest earned is exempt from tax. A fixed rate of interest is set by the provider over a period of time, so the income you receive is also fixed.
Notably, any money you invest in a cash ISA each year is deducted from your equity ISA allowance. The limit for a cash ISA is £5,640.
Equity ISA – risk and reward
Equity ISAs can be a little more complicated but essentially allow tax-free investments of up to £11,520 (minus any money invested in a cash ISA in the same year).
The important thing to remember about stocks and shares ISAs is that your money is not protected – your investment will rise and fall with the stock market. While this offers the opportunity of greater income, because of its variable nature, the value of your ISA could be substantially reduced if the stock market takes a dive.
What about the ethical or sustainable options?
Ethical or sustainable investments, whether in an ISA or any other form, allow you to apply your personal morals and principles to your money.
Some investors go down the exclusionary route, rejecting harmful stocks such as tobacco, alcohol and armaments, while others focus on positive investments, and look to invest in companies and industries tackling some of the most urgent sustainability challenges.
Most ethical banks and building societies offer ISAs in some form or another. Triodos, for example, offers a range of cash ISAs, as well as a junior ISA. Our Guide to Sustainable Banking 2012 profiles some of our favourite ethical financial institutions.
Campaign group Move Your Money has a ‘best buy ISAs’ section on its website, where it lists some of the best socially responsible options on the market.
YourEthicalMoney.org is another great resource for sustainability-minded investors who wish to make the most of tax-free savings in the coming 12 months.
Be quick, though; by April 6 (Saturday) you’ll have lost the chance to use this year’s ISA allowance, as the new tax year begins. So make sure you get your sustainable ISA applications in today or tomorrow.
Further reading:
Why I’ll be investing my children’s junior ISA funds sustainably
Budget 2013: green businesses call for sustainable ISA incentives