The earlier each year you invest some or all of your ISA allowance, the longer your money has to work for you, so it makes sense to invest early in the tax year, to get up to 12 months tax-free interest.
It also makes sense to open a new ISA as early as possible with as much money as you can spare and then add more, up to the limit, later in the tax year, though some fixed-rate ISAs only allow one initial deposit.
Find the best, low rate deal
A cash ISA is effectively a tax-free wrapper for your savings and unlike interest earned on normal savings accounts, you don’t have to pay tax of 20 per cent on the interest earned (or 40 per cent if you are a higher rate taxpayer).
With the Bank of England base rate at a record low of 0.50 per cent, savings rates are historically low. The drop in savings rates has been influenced by the Bank of England’s Funding for Lending Scheme (FLS) which aims to encourage banks to lend to individual and businesses.
The scheme allows banks to borrow at reduced rates on the condition that they pass on the cheaper loans to customers. However, it means they have less need to attract deposits from savers as they can access funds in a different way, which in turn means they don’t need to offer as high savings rates.
Although rates are low, a cash ISA still represents the most effective way to get as much income from your savings as possible without losing any of it to the taxman.
It also means that finding the best deal is more important than ever.
Fixed or easy-access ISAs?
When selecting the best cash ISA for you, you need to decide whether you will need to access your cash at any time or if you think you can set aside the funds for a longer period.
Another factor affecting your decision will be whether you want make one large deposit into your savings account or drip-feed regular deposits.
If you want to pay in one lump sum, then a fixed rate savings account may be the best option. If you opt for regular smaller deposits then an easy-access savings account or a notice ISA may be more suitable.
Perhaps you know that you will need access to your funds, and in that case you should select an easy-access cash ISA because you will not be penalised for making withdrawals.
If you think you do not require access to your funds, then you could put your savings in a fixed-rate cash ISA. This will:
- Normally pay a slightly higher rate of interest
- You will lose up to 180 days interest for making withdrawals until the end of the term unless you have a notice ISA where withdrawal conditions are specified in advance as part of the product
- There is also a range of Notice Cash ISAs available
Remember, if you invest all of your ISA allowance and then withdraw some of it, you can’t then deposit the money back in your ISA
Benefitting from bonus rates
Many easy access cash ISAs entice investors with attractive bonus rates, raising the headline savings rate to attract customers. It is fine to take advantage of this, but it is vital that you set a reminder for when the bonus rate ends to switch to the best deal available at that time.
Recent research by Moneysupermarket.com found that savings rates often fall dramatically when the bonus rate comes to an end.
For instance, in one of the best buys at the end of the 2012-13 tax year, offered 3.0 per cent on its cash ISA, which included a bonus of 2.75 per cent for the first 12 months. So savers who went for this option would have seen the rate reduced to just 0.25 per cent.
This means that though they would have earned interest of £160 if they had invested the full ISA allowance last year, if they were to keep the account running, they would earn just £13.30 in the next 12 months.
Some ISAs accept transfers-in of previous tax years ISAs balances, but not all, so if you have an ISA balance from previous tax years, you may be able to transfer the funds into your new ISA and take advantage of a higher rate but you need to check with the provider.
Managing all of your funds through one provider is easier, but be aware that the Financial Services Compensation Scheme (FSCS) only covers deposits with one provider up to £85,000 and this includes subsidiaries of different banks, so if you hold two savings accounts with one banking group , it would count as one provider.
If you do transfer an ISA from one provider to another, you need to make sure you don’t close it but follow the accepted transfer procedure, otherwise you will lose the tax-free status of your savings.
The accepted transfer procedure is that once you have identified the new ISA you want to transfer an ISA balance from previous tax years into you need to ask the new ISA provider to manage the transfer. You will need to fill in a form providing details of the previous ISA and your new provider will contact your old provider to transfer the funds.
Providers have become better at managing transfers and have to complete the transfer within 15 days under new rules introduced in January 2011.
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