| Individual Savings Account (ISA): |
Launched in 1999, the ISA succeeded previous tax-free products such as TESSAs (Tax-Exempt Special Savings Account) and PEPs (Personal Equity Plan). Depending on the type of ISA, ISAs allow savers to save and earn interest, dividend income and dividends tax-free up to the maximum allowance which currently stands at £15,240 for the 2015 to 2016 and 2016 to 2017 tax years. ISAs come in different forms:
- Cash ISA – a product that allows you to save cash holdings within the ISA wrapper. New ISA rules (coming into effect in April 2016) mean that savers who withdraw money from their Cash ISA will be allowed to top them up, even if they have reached the maximum allowance;
- Stocks and Shares/Equity ISA – a product that allows you to hold stocks and share investments within the ISA wrapper. This can include company shares listed on the stock exchange or Exchange Traded Funds (ETFs);
- Help to Buy: ISA – a cash ISA which is available to first time homebuyers only. Savers are given a 25% bonus to top up their savings from the Government of up to a maximum £3,000. To obtain the bonus, the ISA can only be used in exchange for the purchase of a first home; you can make an initial deposit of up to £1,000 to open the account and save up to £200 every month. If you save £12,000 you’ll receive the Governments maximum £3k bonus which will boost your total savings to £15k.
- Innovative Finance ISA – This product is being launched in April 2016. This will allow savers to hold their peer-to-peer loans and debt-based securities or loans within the ISA wrapper;
- Junior ISA (JISA) – available for younger savers up to 16 years old, this product is a great way to encourage children, as well as their family to put money away from an early age. The JISA currently has an annual maximum allowance of £4,080;
The ISA wrapper is a term used to refer the tax-free protection around all your savings and investments. The ISA is not an investment in its own right, the tax wrapper in effect shields your savings and/or investments from some or all of the tax that would normally be due.
Cash ISAs, stocks and shares ISAs and the forthcoming Innovative Finance ISA are all treated differently by the taxman. Therefore, in a single tax year, savers can choose to use/invest all of their allowance and save in one type of account e.g. a cash or they can spread their allowance across a combination of a Cash, Stocks and Shares or Innovative Finance ISAs up to the maximum allowance of £15,240. You are not allowed to hold two of the same types of ISAs in the same tax year.
ISAs can be transferred between providers, but it is important to look at the specific rules of your account. Some providers holding Stocks and Shares ISAs may charge an exit fee or some Cash ISAs may not allow you to make withdrawals if it is fixed rate account. Always check the rules because you want to avoid losing interest.
Importantly, once you have reached the end of the tax year, you are then allowed to build your allowance for the following tax year. Many providers allow you to transfer ISAs held in other accounts from previous tax years into an account opened with them. This does not affect your contributions for that tax year. It is important you transfer and do not withdraw as this could result in you losing the tax-free status of the ISA. Ask your new ISA provider to organise this transfer for you.
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| Interest rate: |
The Bank of England sets what is called the base rate, this rate is used by the banks, building societies and other financial providers for setting interest rates on their savings and lending products. For savers, the interest rate refers to the percentage return they should expect to receive in one year on their deposit e.g. a 2% interest rate on a one-year fixed ISA with a balance of £1000 would give you £20, giving a total balance of £1020.
The rate is a very important factor when choosing an account, so make sure you shop around to find the best one on offer. Comparison websites are a good starting point and can save you time. Also check the terms and conditions because while the rate may be good, there may be a few hidden conditions that could catch you out later.
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| Inflation: |
In economics, inflation refers to a general increase in prices and fall in the purchasing value of money. In a low interest rate environment, high inflation erodes the values of your savings. For example, if you kept £100 savings in a jar for a year and inflation ran at 2%, then as prices increased over that year, you would find that the value of your £100 has decreased in terms of purchasing power i.e. if the cost of living has increased by 2% but the value of your £100 has remained static.
This is the same with savings accounts, if your account comes to the end of its fixed term rate then often the rate drops to a lower rate. If the rate of interest you are receiving on your savings account is lower than the rate of inflation, then the real value (i.e. in terms of purchasing power) of your savings ultimately diminishes. The inflation rate is measured using a system called the Consumer Price Index, normally referred to as CPI and is published monthly by the Office for National Statistics.
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