A beginner's guide to making the most of your ISAs15th Mar 19 | Lifestyle
As the new tax year approaches, there are plenty of ISA options to weigh up.
ISA providers are jostling for savers’ attention ahead of the the new tax year in April – and the market is looking brighter for savers, with some providers increasing their rates.
The average cash ISA rate, including fixed and variable deals, stood at 1.32% in early March, according to Moneyfacts.co.uk. A year ago it was 1.13% – and a year before that, in 2017, it was a paltry 0.82%. Rachel Springall, a finance expert at Moneyfacts, says “table-topping” deals have appeared recently, adding: “ISAs are clearly undergoing a period of recovery, and right now we’re seeing some of the best ISA rates for some time.”
ISAs have traditionally had advantages over other types of savings accounts, as money in them is ring-fenced from tax. But the personal savings allowance, introduced in 2016, means up to £1,000 of income from savings is now tax-free for basic taxpayers – so people can save their money in non-ISA accounts and still pay no tax on their interest. Higher-rate taxpayers have an allowance of up to £500.
However, money held in ISAs is ring-fenced from tax for as long as it stays in there – whereas in the years to come, savers with money in non-ISA accounts may one day find themselves paying tax on interest. The annual ISA allowance is currently £20,000.
Unsure where to start or which direct to take with your ISA saving? Here’s how to make the most of what’s on offer…
Decide what type of ISA you want
ISAs have evolved greatly over the years. As well as the simple choice of cash or stocks and shares ISAs, there are Junior ISAs for children.
There are also Innovative Finance ISAs, which contain peer-to-peer loans (peer-to-peer lenders match up people looking to invest some cash with those who want to borrow). The rates of return can potentially be much higher than those on cash ISAs – however, there are risks which need carefully weighing up. You may also want to think about keeping some ISA savings in cash, where it could be accessed in the short-term, and some invested elsewhere for the longer term.
If you haven’t checked out ISA deals for a while, now could be a good time. “It’s encouraging that the market is moving in the right direction, far from what it was in 2017, which was the worst year we had ever seen for the interest paid on cash ISAs,” says Springall. “It’s easy to switch ISAs and most of the best deals allow transfers in from other cash ISAs, so this should be taken fully advantage of to get the top rates.”
She suggests savers check terms and conditions before arranging a move from one ISA to another – and be careful not to cash in the account to reinvest, as the money will lose its tax-free status.
Think about the long term
ISAs can help you save towards a longer-term goal, such as buying a home or retirement. Stocks and shares ISAs may produce higher returns over longer periods than keeping savings in cash. Savers would need to be prepared to endure the ups and downs of the market, which could mean losing some money. Sarah Coles, a personal finance analyst at Hargreaves Lansdown, says that, alongside pensions, ISAs can be a “vital part of the retirement income jigsaw”. Depending on the rules around your particular product, you could potentially dip into ISA savings before you access your pension, which could top up your income if you’re considering going part-time before you retire for good.
Meanwhile, there’s the Lifetime ISA, which is designed for people buying their first home or saving for retirement and comes with a government bonus. But there are restrictions around withdrawals which need consideration, as charges could apply. There is also the Help to Buy ISA for first-time buyers, which has a government bonus too.
Consider whether or not to put all your eggs in one basket
If you’re worried about the ups and downs of investments in a stocks and shares ISA, you could consider spreading your savings. Emma-Lou Montgomery, associate director for personal investing at Fidelity International, says: “The benefit of a stocks and shares ISA is that it allows you to spread your savings across a range of investment vehicles, such as bonds, equities and funds. While this is a more risky option than a cash ISA, the true value of a stocks and shares ISA tends to manifest itself over the long term with returns superior to that offered by cash.”
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