# I am a d1psh1t ... can someone please explain isa's to me?



## nudda (Oct 28, 2008)

Ive resolved to calling myself a d1psh1t as I cannot get an answer from anywhere. Can someoone please clarify this for me.

As an example, say I open an isa with £3600 in there at the beginning at 2% interest.

Does that mean ...

1st month = 3600 + 2%
2nd month = 1st month total + 2%
3rd month = 2nd month total + 2%

.... and so on until 12 months is over in April ?

It's probably really simple but im having a blonde moment with this (no offence blondies  )

Thanks !:thumb:


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## RP84 (Sep 3, 2007)

2% interest over the 12 months mate


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## RP84 (Sep 3, 2007)

have a look at this

http://www.isa-saving.co.uk/isasite/isa_saving_calculator.html


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## nudda (Oct 28, 2008)

Thanks mate.

Am I being silly here or is that just not worth it ?? 

Also, can you tell me what it means by basic and higher rate ?


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## Silver R26 (Jul 19, 2008)

Basic means lower rate tax payer 
Higher means higher rate tax payer

Not sure what the limits are now first 6.5k earnings tax free, then up to 43k is basic, then over that it higher rate.


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## nudda (Oct 28, 2008)

Great stuff - thanks.

I just dont see the benefit of an isa ... its hardly anything. Like saying "let me invest your 3600 somewhere and in the end Ill buy you and your family some nandos"


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## Tricky Red (Mar 3, 2007)

They are worth it in so much as they are a simple tax free investment which is free from Capital gains tax too.


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## James_R (Jun 28, 2007)

But rewind to last year and you would have been getting 5.5% or thereabouts.

The interest on mine is 4 times less than it was 6 months ago.


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## parish (Jun 29, 2006)

nudda said:


> Does that mean ...
> 
> 1st month = 3600 + 2%
> 2nd month = 1st month total + 2%
> ...


Wish it did - 2% per month = 26.82% p.a. :doublesho


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## Simmo (Aug 31, 2008)

you can get up to 3.5% if you shop about...

in 3 years time your £3600 x 3 = 10,800, even at 3.5% = £380, which would be a gross pay increase of £450ish.

when interest rates go up it can be a good additional income.


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## nudda (Oct 28, 2008)

Simmo - now thats interesting ... so you can pretty much lock away 3600 each year ... get away from CGT and earn interest on the WHOLE lot ? That seems more like it !!


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## Schnorbitz (Aug 18, 2007)

That's the idea ;-). The real benefits from saving come from 'compound' interest. That is, earning interest on top of interest, so it's really important you don't withdraw the interest if you want to get a good return on your investment.

What this means is by the end of year one you only get £3600x3.5%=£3726. But after year two, assuming you invest your full entitlement again, you get £3600+£3726x3.5% = £7838. And after year three you get £3600 + £7838 x 3.5%= £11838.

If each year you withdraw all the interest you earn, over the three years your total amount saved is £3600x3=£10800, you withdrew interest worth £756 (year one=£126, year two=£252, year three=£378), losing you £282 overall. The larger amount you have, and the longer you have been/will be saving, the more important it will be to reinvest the interest to take advantage of compounding. You can also start to see the importance a few percentage points will make on your savings.

Someone will correct me if I am wrong about this! But hopefully you get the idea. Plus there is no tax paid on the interest, so if you have the cash then putting it in an ISA is _usually_ a good idea.


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