Returns still poor for ISA savers despite bumper allowance

The Personal Savings Allowance has made the decision to invest in an ISA less straightforward. Picture: Getty/Wavebreak Media

Savers can now put away up to £20,000 into ISAs in the 2017/18 tax year. In the previous tax year, the annual ISA limit was £15,240.

So what will you do with your allowance? And is it still worth paying into an ISA?

The introduction of the personal savings allowance last year has taken most people out of paying any tax on their savings interest altogether.

Traditionally, ISAs were the place where you put your cash to ring-fence it from the taxman, but now you can put the money in a variety of places and not have to pay tax on the interest.

So is the ISA saving still worth it?

Well, the benefit of ISAs is that as long as the money stays in one, it is sheltered from the taxman year after year.

With the Personal Savings Allowance, you may not be paying tax on interest earned from non-ISA accounts now, but that may not necessarily be the case forever. For example, if interest rates start to become more generous in years to come, a saver could be pushed over the Personal Savings Allowance threshold.

And which is the right ISA to choose? It’s no longer simply a choice between a cash or a stocks and shares ISA – nowadays there’s a whole family of ISAs to choose from. This is made up of the following products.

Standard ISA

This could be a tax-free cash ISA or one where money is invested in stocks and shares. Some ISA providers will allow you to withdraw ISA cash without it affecting your annual allowance – as long as you replace the money within the same tax year.

Lifetime ISA

This was launched on 6 April and allows people to save for their first home or their retirement in the same pot. You can open an account if you’re aged 18 or over, but under 40. Savers can pay in up to £4,000 a year and get a government bonus of 25 per cent of the money you put in, up to a maximum of £1,000 a year.

Help to Buy ISA

This is for people saving for their first home and it also comes with a government bonus. The minimum bonus is £400, and to get it you will need to have saved at least £1,600. The maximum government bonus is £3,000 and to receive that you need to have saved £12,000.

Junior ISA

These are available to children aged under 18. Parents can open an account on behalf of their child, who can withdraw the money when they reach 18 – or carry on saving it.

Innovative Finance ISA

Money invested through peer-to-peer lenders can be included in an ISA. The potential returns on offer may be higher than with a standard cash ISA, but there are also generally greater risks involved which need to be considered.

And how are cash ISA rates looking? Disappointingly, the average rate offered on an easy access ISA has fallen from 1.05 per cent to 0.62 per cent in the past 12 months, according to financial information website Moneyfacts. But Rachel Springall, a finance expert at Moneyfacts, says: “Fixed rate ISAs have improved slightly over the past couple of weeks during the peak of ISA season – which is great news.”