How to make the most of Isas: You can save more money now, the returns are tax-free and the rules are flexible

Rob Griffin sees how you can surmount the one big obstacle
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The Independent Online

The countdown has begun again. With just two weeks left to the end of the tax year, time is running out for people to use up any of their remaining Isa allocation.

Savers only have until Sunday 5 April to place funds from their 2014-2015 tax-free allowance in cash or stocks and shares Isas, or they'll lose the opportunity and any subsequent investments will come out of next year's quota.

However, the big question is whether anyone will be bothered about putting money in a cash Isa given the meagre rates of interest being paid, according to Rachel Springall, a finance expert at the data provider Moneyfacts. "Savers will have been hoping for a buzzing Isa season, but instead they are finding a stagnant one," she says. "They are faced with a 'use it or lose it' scenario, but with cash Isa rates as poor as they are today, it will be no wonder if people lack the enthusiasm to save tax-free."

While Ms Springall supports last year's decision to increase the maximum amount that you can put in an Isa to £15,000, she argues that banks and building societies must offer greater rewards if they are going to attract any new customers.

"Increasing the Isa allowance is great, but it's the savings rates that really need improvement," she says. "The average Isa has fallen to 1.45 per cent from 1.62 per cent a year ago and 1.78 per cent two years ago."

However, while high-street banks are refusing to fight for custom, it's a different story in the world of stocks and shares, with investment firms desperately trying to lure people into their funds at what, traditionally, is a popular time of year for buying.

The difficulty for investors is that the investment companies push products that have already performed well, so there is a danger that they jump in at the top of the market, according to Patrick Connolly, a financial planner at the adviser Chase de Vere.

"Investment companies, platforms and execution-only firms usually push 'flavour of the month' funds or those with strong short-term performance, because investors often buy funds which have been hyped up or have just performed well," he explains. The risk, then, is that the returns may have peaked and be about to head down.

If you're undecided, the good news is you don't have to rush into making any investment decisions you could subsequently regret, according to Laith Khalaf at the adviser Hargreaves Lansdown.

"If you need more time, you can secure your stocks and shares Isa [allocation] for this year by opening it with cash and investing at a later date," he says. "This is also an option for investors who may be concerned about the effect the UK election will have on UK stocks, and who want to wait until after May to invest."

Isas have been around since 1999 but the overhaul last year resulted in a dramatic increase in the amounts that could be invested each year. There was also a relaxation of the rules governing these products.

With that in mind, we bring you up to date on what's allowed – and how to make the most of your tax-free allocation.

What are the different types of Isa?

There are two types: cash and equity. With cash Isas – by which we primarily mean bank and building society accounts – you don't pay tax on any interest received. Stocks and shares Isas, meanwhile, can invest in assets such as companies, unit trusts and corporate bonds, and no tax will be due on income or capital gains enjoyed.

This also means that you don't need to declare any Isa interest or profits on your tax return.

Who can take one out – and how much can be invested?

Any UK resident aged 16 or over can open a cash Isa, although they need to be 18 for a stocks and shares Isa.

A maximum of £15,000 can be invested in each tax year – which runs from April 6 to April 5 – either in one type of account or split between the two.

What are the rules on switching?

There is plenty of flexibility when it comes to managing your Isa assets. For example, you can transfer your account from one provider to another at any time, which gives you an incentive to shop around for the best rates.

The rules mean you can transfer one cash Isa to another cash Isa with a different provider, and do the same with a stocks and shares account. You can also switch a cash Isa to a stocks and shares Isa and vice-versa.

However, if you want to transfer money you've invested in an Isa during the current financial year, you must transfer all of it.

For previous years, you can choose to transfer all or part of your savings.

In addition, you'll need to check with your provider for any restrictions or charges that may apply.

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