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Why 2012 is the year of the ISA

Recent years have proved tempestuous for investors – and as the economic crisis rumbles on, seeking the most attractive opportunities for your hard-earned cash is tricky. But by maximizing the use of your Individual Savings Account (ISA) allowance, you will at least benefit from an array of tax advantages to boost your investment.

There are numerous reasons why ISAs are particularly attractive in 2012 – not least because with interest rates in the doldrums and an uncertain outlook for the stock market, picking a savings vehicle that offers several advantages aside from basic growth is appealing.

Willing to take on risk

If you are happy to take on more risk, stocks and shares ISAs may provide greater long-term growth than cash ISAs – and you have greater choice of what to include in them. You could hold shares, property or bonds in these tax-efficient wrappers, and therefore diversify your investments to suit your preferences. The value of investments can go down as well as up and you may get back less than you invested.

The maximum that can be saved into a stocks and shares ISA is £10,680 this tax year, rising to £11,280 from April 6. However, these allowances are reduced by anything that is already saved into a cash ISA. The eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.

Staying in control

With ISAs, you remain firmly in control of your investment as they are flexible savings vehicles.

Given the tax advantages, there is little point making other savings in a tax year until you’ve used your ISA allowance. After all, they are simple to understand, and easy to open – and remain flexible, unlike saving in a pension fund where you’re locking your money up until retirement. This way, your ISA fund could supplement your pension income, but it might also be used as an ‘emergency fund’ should the need arise – for example, if you have tax bills to pay.

However, get your skates on to make sure you use your allowance this tax year – as it’s a ‘use it or lose it’ sum that can’t be rolled over into the next tax year. And if you make it a regular habit to maximise your allowance, you can save a tidy sum over the long-term that will remain out of the taxman’s grasp.

Pay in as much or as little as you like

You can squirrel away a sum of your choice every month, or choose to use your full allowance in one go if you have the cash to spare.

Also, you can withdraw funds when needed without bothering the taxman, and you can choose to use your allowance to save part in cash and part in stocks and shares, or if you are feeling comfortable taking the risk, all in stocks and shares.

Saving for children

It’s tricky to know the best way to save for your children, but ISAs offer the ideal solution – enabling the whole family to save for their future.

This is the first tax season when the whole family can top up their ISAs. The Junior Isa, launched in November, allows family or friends to save up to £3,600 each tax year into a tax-free account on behalf of children.

As with the adult ISA, the ‘Junior ISA’, can be held in cash or invested in stocks and shares. Accounts are open to anyone aged 17 or under who does not already have a Child Trust Fund (CTF).

However, bear in mind that cannot be withdrawn until the child turns 18 – but then may be used, for example, to help fund higher education or put towards a deposit to get a foot on the property ladder.