24 March 2015
Are you making the most of your savings?
Kate Murray, Lead Savings Products Manager at Principality Building Society, outlines the importance of knowing your options when it comes to Individual Savings Accounts (or ISAs as they are more commonly known).
As one tax year ends and another begins, once again ISAs are a hot topic of conversation for savers. If you haven’t already done so and are in a position to save, now is a good time to consider your investment options for the coming 12 months.
In the Chancellor’s Budget earlier this week he announced that from April 2016 a new "personal savings allowance" will reward savers by not taxing the first £1,000 of savings income for basic-rate taxpayers, and the first £500 for higher-rate taxpayers. However, the very top earners will not benefit.
But if you want to make the most of your money ISAs can be a great way of maximising the value of your savings as unlike other savings or investments as they allow any gains in investment growth or interest value to build up free of tax. But before committing to one it’s important to understand exactly what you’re signing up to.
Taking a little time to find out what an ISA actually is, what the different types are, and whether it’s the right choice for you can reap dividends further down the line.
ISAs were introduced in 1999. Despite their huge benefits, a common misconception is that ISAs are complicated. This wasn’t helped when they received a big overhaul from the UK Government in July 2014. But despite the changes that came into force affecting the ISA allowance, the premise behind the product remained the same and has in fact given the customer more options.
Whilst there are different types of ISA, the most common are a Cash ISA and a Stocks and Shares ISA. A Cash ISA is an efficient way of protecting your savings and works like a traditional cash deposit account. A Stocks and Shares ISA is an option for savers who want to invest in stock markets. Unlike a Cash ISA, a Stocks and Shares ISA gives you access to a wide range of investment opportunities. This could include anything from company shares, corporate and government bonds, to investment trusts. Stocks and shares ISAs are better suited to those who want a greater return but are willing to take the risk that they may lose money. Naturally, for this option, you need to think carefully about whether you can afford to risk your savings before you invest.
A major benefit of keeping your savings or investments in an ISA is that all of the interest earned in a Cash ISA is kept by the saver, as is any growth in value of the investments held in a Stocks and Shares ISA. Given this benefit, it’s no surprise that ISAs are the product of choice for many savers.
As with any significant financial decision, if you’re not sure that a Stocks and Shares ISA is for you, then you can always speak to a financial advisor before making your decision.
Whether you invest in a Cash ISA or Stocks and Shares ISA both have an individual maximum limit of £15,000 in 2014/2015 or £15,240 in 2015/2016. But it is possible to have both simultaneously. For instance, you can save up to the yearly limit in one type of account or split the allowance into any combination of amounts across both types of ISA up to the overall maximum limit each year, for example you could pay £5,240 into a cash ISA and a further £10,000 into a Stocks and Shares ISA.
One of the most important elements of an ISA to remember to factor in is the element of withdrawing money. It’s a common misconception that once your money is invested you can’t touch it. It is also not the case that you have to set an ISA for a certain length of time in order to reap the tax-free benefits. Some ISAs do require you to commit your money for a fixed length of time, but many do not, so providing the rules of the individual product allow, you can have full and instant access to your money without losing the tax benefits on the rest of your savings within the ISA. But look around at the options and see which one fits your circumstances best.
On Wednesday the Chancellor also announced more flexibility in the ISA system, with the creation of the new Flexible ISA – where savers will have the freedom to withdraw and replace money in the same tax year without it counting towards their annual ISA subscription limit for that year, as long as the repayment is made in the same tax year as the withdrawal. In the past, money taken out of an ISA lost its tax free status.
It also launched a new "Help to Buy" ISA scheme, which will help first-time buyers get onto the property ladder. For every £200 a first-time buyer saves, the government will top up the deposit with £50. This bonus will be available for up to £15,000 only. So, if a first-time buyer saves £12,000, the Government will add £3,000 to the pot. Savers will have access to this money and will be able to withdraw funds from the account if they need them for another purpose, but the bonus will only be made available for those using the money for a home purchase. The Help to Buy ISA will only be available on houses worth £250,000 or less, or £450,000 or less in London.
For many of us, choosing the right place to store our hard-earned savings can be a daunting process. As with any financial decision, it’s a good idea to shop around when you’re looking into opening an ISA. Circumstance can play a big part when choosing the right ISA, but being savvy about your choice will help ensure you’ll get the right ISA for you and your family.