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Kickstart your new early-bird Isa for higher cash returns

THE new tax year started last Sunday, but it's not too early to think about your 2014-15 Isa.

In fact, the earlier you put money into an Isa the better.

Take the example of two savers who both invested the full Isa allowance into the FTSE All Share Index each year from 2000. The early bird saver opened the Isa in May, towards the start of the tax year, while the other waited until the last few days of the tax year. Both would invest a total of £93,080 but the early bird could expect a return of £167,619 compared to £136,909 for the latecomer, according to figures from Fidelity. That's a difference of £30,710.

Mark Till, Head of Fidelity Personal Investing, says: "It's easy to put off making our Isa investments each year, but getting in early can make a significant difference to your Isa savings pot over time."

Jason Chapman, managing director at discount broker Willis Owen, commented: "We know that rather than having a lump sum to invest, some investors may have a little spare money each month.

"By drip-feeding that money into the market, it could be working harder for you as it will smooth out the volatility of market prices on the value of your investments."

Anyone who wants to kick start their Isa early this year has to get to grips with two sets of rules as Isas will automatically convert to New Isas (Nisas) on July 1.

The delay in the introduction of Nisas is to give companies time to adjust to the new regime, but it makes life a little bit complicated for early bird savers.

The Isa allowance rose from £11,520 to £11,880 on April 6 and you can invest up to the full amount in a stocks and shares Isa. Or, you can put up to £5940 into a cash Isa and the remainder in stocks and shares. You cannot put the full allowance into a cash Isa.

For example, you could put £5940 into a cash Isa and £5940 into a stocks and shares account. Alternatively, you could invest £10,000 in stocks and shares and put the remaining £1,880 into cash. The important thing to remember is that you cannot breach the cash limit of £5940 or the overall limit of £11,880.

Normally, the Isa allowance would remain the same throughout the tax year, but this year is different as the limit will rise on July 1 to £15,000 when Isas become Nisas. Any money you have already invested in an Isa between April 6 and June 30 will count towards the Nisa limit.

So, if you have put the full allowance of £11,880 into stocks and shares, you could top up your Nisa with £3120 between July 1 and April 5 2015 to use up the full allowance of £15,000. Or, you might decide to open a cash Nisa and deposit up to £3120.

Nisas are more flexible than Isas, as there are no limits on the amount you can put into cash. For example, if you had opened a cash Isa in April and put in your full cash allowance of £5940, you could top up your cash Nisa in July with £9060 to bring you up to the £15,000, almost three times the current limit. Alternatively, you could add £5000 to your cash Nisa and open a stocks and shares Nisa to invest the remaining £4060.

Many Isa firms have yet to announce their plans for Nisas, so experts warn that you should take care if you intend to pay into a fixed-rate Isa early in the current tax year because traditionally fixed-rate deals do not allow additional payments.

Susan Hannums, director at Savingschampion.co.uk, a savings advice site, says some leading Isa providers have already announced plans to allow customers to maximise their Isa allowance by topping up in July. "However, we are still very much in the dark with the majority of Isa providers, so savers would be wise not to rush into their choice of fixed-rate Isa before knowing all the facts. It's sensible to first make sure they can top up should they wish to, otherwise it could cost them the ability to make the most of the new limits.

"Even if top-ups are allowed, it's also important to check how flexible the rules are to make sure you don't get caught out, as the terms and conditions are different from provider to provider."

Remember you can only pay into one cash and one stocks and shares Nisa in the same tax year.

As with Isas, you can switch your Nisa if you are unhappy with the performance.

You have to transfer all the savings from the current tax year, but you can split contributions from previous tax years.

However, under the Nisa regime, you will also be allowed to transfer money from cash to stocks and shares and vice versa, giving you greater control over your savings.

Never close down your old Isa before you switch to a new one or you could lose all the tax benefits. Instead, you should contact the provider and request a transfer.

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