It’s fair to say that ISAs have been an incredible savings success story. According to HMRC, in the 2013-14 tax year Brits opened a whopping 13.5 million ISAs and invested over £57 billion into them – paying in an average of £4,250 each.
By the end of the 2013-14 ISA season, the total amount invested in ISAs was £470 billion. Thanks to the changes introduced in the 2014 Budget, with the higher limit of £15,240 for the 2015-16 tax year, and no restrictions on how you can split your investments, their popularity only looks set to grow.
But with hundreds of products available, ranging from straightforward cash ISAs to those offering DIY investors the opportunity to dabble in the stock markets, knowing what to look for can be a challenge. Here are some top tips that could help you navigate the market and find the best ISA for you.
Finding the best cash ISA
If you are looking for somewhere to put your money, using a comparison website is often the easiest way of finding the best cash ISA savings deal. To get a complete list of the best-paying accounts from across all UK banks, ensure you select ‘all accounts’ when doing your search rather than just those that pay commission to be promoted.
Keep in mind that while securing a good interest rate is a top priority for most savers who are looking to switch accounts, reading the detailed account terms and conditions carefully is important, as some cash ISAs come with short-term bonuses that typically only last a year or so. Easy access accounts are usually a variable rate, so even though they can look attractive, they could be reduced.
Keep track of interest rates
One way to stay on top of your interest rates may be to use an online savings account monitor. Rate Tracker, for instance, is a free service that reminds you when your interest rate is set to fall so that you can move your money to maximise your return.
“The key with cash ISAs is, when transferring, to always approach your new chosen ISA provider to arrange the switch for you. Never withdraw the money yourself,” says Susan Hannums, director at Savingschampion.co.uk. “Once the money has been withdrawn it cannot be replaced and you lose that part of your allowance, forever.”
Should you wish to transfer to another organisation, contact them for a transfer form and let them arrange the transfer for you. The transfer should take no longer than 15 days, so if it does take longer contact them for an update. Many providers are switching to electronic transfers to speed up the process. If both parties have electronic transfer systems, switching provider can take as little as a couple of days.
Don’t put all your eggs in one basket
If you have a considerable cash savings pot, it may be wise, or you may wish to consider, spreading your money between savings accounts with different outlets.
While the government-backed Financial Services Compensation Scheme (FSCS) would refund your savings up to a maximum of £85,000 (or £170,000 for a joint account) should your bank collapse, this limit is for each bank, not each individual account. In other words, if you had two accounts each containing £85,000 with one bank you would only be entitled to a total of £85,000 in compensation.
It is important to remember that if you have more than one account containing £85,000 with two banks in the same banking group, you would get total compensation of £85,000, unless each is individually authorised by the Financial Conduct Authority.
Buying stocks and shares ISAs
Cash ISAs are by far the most popular form of ISA, accounting for 78% of all new accounts opened in 2013-14, but stocks and shares ISAs also have a role to play.
You can buy stocks and shares ISAs from different providers, with the cheapest offers often available through ‘DIY supermarket’ websites.
Investing in a stocks & shares ISA is a two-stage process. First you need to pick which provider to buy your ISA from, and then you need to decide what investments to put in it. This can include government and corporate bonds, investments in the entire stock market or selected companies, or managed investment funds.
Be aware that there are charges for the use of the platform and buying the funds, and some of your earnings can be taxed. As with all market investments, the value of your investment can fall as well as rise.
The 2015 Budget, announced in mid-March, has introduced a number of further changes to the ISA system.
From Autumn 2015, following consultation with ISA providers, the Government will allow ISA savers to withdraw and replace money from their cash ISA without 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. This will enable savers to access their ISA savings more flexibly without losing the benefits they have built up.
Are you saving for retirement? Do you have any handy hints or tips about ISAs that are helping you reach your goals? We’d love to hear from you so please feel free to share your comments with us below.
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.
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