Is it about time you got a nicer Isa?
Are your savings working for you? VICKY SHAW presents a no-nonsense guide
WITH the new tax year having started on April 6, this time of year is traditionally known as ‘Isa season’, when competition between providers is ramped up as savers look to take out new deals.
While the Isa market has been a bit lacklustre in recent years in the low-interest environment, there are still good reasons why an Isa could be worthwhile, depending on your individual savings needs.
And in recent weeks, there have also been signs of new life breathing into the Isa market. So here’s a guide on how Isa saving could help you...
HOW DO ISAS WORK?
ISAS are a tax efficient way of building a savings pot. Money held in Isas is ring-fenced from the taxman. While there are many different types of Isa to choose from nowadays, research from Aldermore Bank found that over three-fifths (62%) of people use only one Isa product to save.
THINK ISAS ARE NO LONGER WORTH IT? YOU MAY WANT TO THINK AGAIN
THE introduction of the personal savings allowance has led many savers to wonder whether it’s worth bothering with a cash Isa, given savers no longer pay tax on the first £1,000 of interest, or £500 for higher rate taxpayers.
But Sarah Coles, a personal finance analyst at Hargreaves Lansdown, says it’s important to think ahead. “The key is what you could save further down the line. The tax savings on Isas accumulate as your savings build,” says Sarah. “These savings will be magnified if interest rates rise, you move tax brackets, or the savings allowance is cut.”
Meanwhile, there have been signs of life returning to the cash Isa market this spring. Rachel Springall, a finance expert at moneyfacts.co. uk, says: “As we have seen over 100 rate rises to Isas since the start of 2018, it’s worthwhile for savers to consider utilising their Isa allowance for the long-term benefits, and avoid any delay in applying for the top rates before the buzz of Isa season fizzles out.”
HOW CAN YOU MAKE THE MOST OF YOUR ISA ALLOWANCES?
WHAT you are saving for will have a bearing on which type of Isa you choose. If you’re saving for the longer term, stocks and shares may be an option to consider. Or a cash Isa may be more suitable if you want to access your money quickly and don’t like the idea of risk.
“You can tailor your Isa to take exactly the amount of risk that suits your needs,” says Sarah. “You can opt for a cash account, conservatively-invested funds, more adventurous funds, single company shares, or any combination of all of them. You can also transfer between assets if your circumstances change.”
The Isa allowance for 2018/19 will remain unchanged at £20,000.
WHAT ABOUT KIDS’ SAVINGS?
THERE are cash, as well as stocks and shares versions of Junior Isas. Parents can open a Junior Isa and manage the account on their child’s behalf. The child can’t withdraw the money until they turn 18.
Sarah says they can be a great way of getting children into the savings habit – which will stay with them into adulthood. “In our experience, a year after a Junior Isa becomes the property of an 18-year-old, more than 90% remain invested”.
HOW ABOUT PEOPLE SAVING FOR THEIR FIRST HOME?
SOME Isas have government bonuses to help you onto the property ladder. Adults aged under 40 can open a Lifetime Isa, which helps people save for their first home, or their retirement, in the same pot.
Help to Buy Isas are also available to those saving for their first home. Both have pros and cons, depending on your individual needs, so it’s worth weighing these up.
WHAT OTHER TYPES OF ISAS ARE THERE?
MANY people are now interested in ‘ethical’ savings accounts, which could have a positive impact. Two-fifths (42%) of savers would be motivated to save in an Isa if they knew their money would be used to finance improvements to society, a survey by Triodos Bank has found.
There are also ‘innovative finance Isas’, where money invested through peer-to-peer lenders can be held in an Isa. The potential returns available may be higher with an innovative finance Isa than just keeping the money in a cash Isa, but there are also risks which should be carefully considered.