The average cash ISA rate, including fixed and variable deals, stood at 1.32 per cent in early March, according to Moneyfacts.co.uk. A year ago it was 1.13 per cent – and a year before that, in 2017, it was a paltry 0.82 per cent.
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 there, whereas savers with money in non-ISA accounts may one day find themselves paying tax on interest. The annual ISA allowance is £20,000.
Unsure where to start or which direction to take with your ISA? Here’s how to make the most of what’s on offer.
Decide what type of
ISA you want
ISAs have evolved over the years. As well as the simple choice of cash or stocks and shares ISAs, there are Junior ISAs for children and Innovative Finance ISAs, which contain peer-to-peer loans. The rates of return can be higher than those on cash ISAs – however, there are risks. 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.
Rachel Springall at Moneyfacts says: “It’s easy to switch ISAs and most of the best deals allow transfers in from other cash ISAs, so this should be taken 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
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. 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, the Lifetime ISA 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 to put all your eggs in one basket
Emma-Lou Montgomery of Fidelity International says: “A stocks and shares ISA 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.”