The start of March signals the beginning of ISA season, when savers and investors pour billions of pounds into cash and equity ISAs.
ISAs are a great savings and investment tax shelter if you’ve used up your pension allowances, or need access to the funds before age 55.
The annual ISA allowance is now £20,000 – easily enough to satisfy the flexible savings needs of most of the population. Anyone aged 16 and over can now shelter up to £20,000 from tax in an ISA in 2017/18, but you must be over age 18 to invest in a stocks-and-shares ISA, or an innovative finance ISA.
The ISA allowance is ‘use-it-or lose-it’, which means the current year’s allowance expires on 5th April. However, the government has announced that the allowance will remain the same in 2018/19. Savers and investors looking to shelter more than £20,000 can therefore use both the allowance for 2017/18 and for 2018/19 to move up to £40,000 into ISAs by the 6th April 2018.
For cash savers, interest rates are still very low, but they have improved a bit since this time last year. The best instant access ISAs pay around 1.2% (https://www.moneysavingexpert.com/savings/best-cash-isa). The best two-year fixed rate cash ISAs pay around 1.65% (https://moneyfacts.co.uk/savings/best-savings-accounts/), while those who are prepared to lock their money away for five years can get around 2.15%. (https://www.moneysavingexpert.com/savings/best-cash-isa).
When it comes to cash savings, basic rate and higher rate taxpayers also benefit from the personal savings allowance. This allows up to £1,000 of interest a year (basic rate taxpayers) or £500 a year interest (higher rate taxpayers) to be received tax-free from normal (non-ISA) cash savings accounts. Nil-rate taxpayers can receive interest up to the level of their unused part of their personal allowance (£11,500 in 2017/18) without paying tax on interest.
The best instant access accounts pay around 1.3% (https://moneyfacts.co.uk/savings/easy-access-savings-accounts/). The best two-year fixed rate cash bond pays around 2.1% (https://moneyfacts.co.uk/savings/fixed-rate-bonds), whilst the best 5-year bond pays around 2.4% (https://moneyfacts.co.uk/savings/fixed-rate-bonds/).
What is immediately apparent when comparing the above rates, is that normal savings accounts generally pay higher rates of interest than cash ISAs. If the interest from cash savings is within your personal income tax allowance or within the personal savings allowance, it may therefore be better holding your cash savings in a normal savings account. This will leave your ISA allowance free for stocks and shares.
If you are prepared to take a bit more risk, then a stocks-and-shares ISA is an option. These ISAs, which are usually invested in the stock market (see https://www.aviva.co.uk/retirement/news-views/newsletters/january-2017.html) or bonds (see https://www.aviva.co.uk/retirement/news-views/newsletters/feburary-2017.html ), can potentially deliver much better returns than cash over the medium to long term.
If you’re considering a stocks-and-shares ISA, you should only do so if you are prepared to invest over a longer period. And, bear in mind that higher returns than cash are not guaranteed, because no one knows how investment markets might perform in the future.
Although the main ISA allowance is unchanged, junior ISA limits are set to rise from £4,128 this tax year to £4,260 on 6th April 2018. Junior ISAs have limited use, as children can make use of their own personal tax allowance – currently £11,500 a year rising to £11,850 from 6th April 2018. If all their income, including interest from cash deposits and dividends from shareholdings, falls within their personal allowance, they won’t pay any income tax.
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