Higher Rate Tax Payers - Why It's Important To Consider Inflation With ISAs
March 2007
The ISA season is well upon us and for this tax year (2006/07) it closes on Thursday 5th April 2007. This means that to take advantage of the tax-free status of an ISA account you can pay in a maximum of £7,000 into a specialised ISA account.
Up to a maximum of £7,000 can be invested in stocks or market related securities such as investment funds or bonds. Alternatively up to £3,000 can be paid into a cash savings account and the £4,000 balance into the stockmarket.
Of course, you don’t have to invest anything into the stockmarket with the majority of ISA account holders just using the cash savings option. Note also that with an ISA you don’t have to use your full allocation, it is possible to pay in just £100 and then should you choose make regular monthly payments into the account. Whatever the case with an ISA you decide how it’s funded.
Why It's Important To Watch Inflation
Inflation right now is running high at official government levels of around 3.5% but possibly much higher. Inflation erodes the value of cash so if your money was invested at 3.5% over year inflation (at 3.5%) would mean your capital is just trading water even though at the end of the year your £1,000 would be worth £1,035.
Simply put at the end of the year it would on average take £1,035 to buy the same amount of goods that cost £1,000 at the beginning of the year.
This is why when inflation picks up smart savers must factor it in to their calculations. And this becomes even more important if you are a higher rate tax payer.
A&L Premier ISA Pays 8.1%
One ISA account that should be considered right now (and for the next ISA season which starts with the new tax year on Friday 6th April 2007) is the A&L Premier ISA which pays an outstanding 8.1% tax-free interest.
Of course though in the personal finance world very few banks do anything these days without throwing in some catches.
The account is only available to those who open an A&L Premier current account. But this isn’t bad news because the current account is actually very good value, here are some of the advantages -
- 0% overdraft (minimum £250) for 12 months then 7.9% for above the agreed overdraft limit
- Free European annual multi-trip travel insurance
- Very easy to switch from your current bank, all direct debits and other payments moved for you
- £500 minimum must be paid into the account every month
- And of course the 8.10% ISA savings rate which is also guaranteed to be at least 1% above Bank of England rates until end April 2008
Summary
Yes, there are catches to the ISA account, namely you have to open a new current with the A&L. But in our experience running a few different accounts is simple when using internet banking..
Money can easily be switched from one account to another, bills paid, even transfer money to a friends account all with a few clicks of the mouse. And as for online security, sure there's always a risk but the banks now have a pretty good hold on protecting their clients from online fraud.
To sum up, please make sure you shop around before taking out an ISA account and with high inflation at present only ISA accounts with good interest rates (and few catches) should be considered.
See Also
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