Despite low interest rates, ISAs are still popular with savers, and with the financial year ending at the start of April, time is running out to maximise your annual allowance. But opening up an ISA is no longer as simple a decision as it used to be.
Here’s a quick guide to recent rule changes, how much you can save, the effect of low interest rates, and new types of Individual Savings Accounts (ISAs).
You can earn tax-free interest elsewhere
You can actually earn £1,000 in interest every financial year outside of an ISA, and still not pay tax on it. This Personal Savings Allowance could mean you can get higher returns from current accounts and regular savings accounts.
The £1,000 allowance is for basic rate or non-tax payers and drops to £500 if you are a 40% ‘higher rate’ tax payer. Even so, with interest rates so low, it requires a huge amount of money to gain this much in interest.
The ISA allowance is pretty big
Most savers won’t have enough cash to fill an ISA each year. The limit is £20,000 for this financial year, which ends on 5th April 2018. You can then save another £20,000 over the following 12 months.
You can take money out and put it back in
Some ISA providers now allow you to make a withdrawal from an ISA in a financial year, and put the same amount back in without it counting twice towards your annual allowance.
Check if your ISA allows this – it might mean you can put more in this year than you planned.
You should move old ISAs
With interest rates so low it’s not just the new ISA you pay into which could have poor returns. All your old ISAs are very likely to have had their rates slashed, and you could easily be earning practically nothing on them.
If you want to move your old or current ISAs you need to find a provider that accepts transfers into ISAs and ask them to move the money. If you withdraw the money instead, the amount you can put back in will be restricted by the annual allowance.
Watch out too for penalties from your current ISA provider.
There’s a third way for everyone to save
Traditionally you can have a Cash ISA, Stocks and Shares ISA, or a mix of the two. There’s now an ‘Innovative Finance ISA’ which puts your cash into peer-to-peer lending. Though these launched in 2016, it’s only recently that many providers have offered them.
As with Stocks and Shares ISAs there’s the chance of larger returns, but you could also lose some of your money – so be careful if you choose this option.
First-time buyers can get a big bonus
Another option is the Help to Buy ISA. It’s open to any UK residents over 18 who have never owned a home. The government will give a 25% bonus on money saved up when a property is purchased. You can deposit £1,000 then £200 a month, up to a maximum of £12,000.
The final choice is a Lifetime ISA which can be used for the same purpose, or kept until retirement.
The above article was previously published on the Money Advice Service blog on 21st March 2018