On 6th April the new tax year begins, and with the British traditionally poor at saving money, now is the time to reassess how you can make the most out of your savings. Now it’s time to discover the top 5 ISA tips and make the most of your tax-free savings.
Moreover, what better place to begin than taking a look at your tax-free options like ISAs (Individual Savings Account) to see if your money could work harder for you.
So, whether you have an existing ISA account looking for ways to get more out of your savings, or are new to ISAs keen to take advantage of tax-free options open to you, then here’s what you should know about ISAs.
1# ISAs allow you to save or invest tax-free
Surprisingly, in 2018, the ISA allowance will not rise. For those starting out saving, this will not be too much of an issue as the allowance for the year is still £20,000. This savings allowance can either be in the form of either cash or investments (stocks and shares).
If you have children, then you can also invest in a child Junior ISA – the allowance for children is marginally increasing from £4,128 to £4,260.
2# You can choose to save or invest in several ways
Much confusion surrounding ISAs is that there are several choices available, savers are understandably puzzled at which one is right for them. If you are new to saving or investing this way, then it can seem confusing, but it is reasonably straightforward.
If you prefer less risk to your savings, then a Cash ISA is the option for you. Like any typical easy-access savings account, you can withdraw the money whenever it suits you. Alternatively, you can open a fixed-rate Cash ISA that limits access to your savings but will pay you a much better interest rate. Withdrawing your savings will incur a penalty in the form of lost interest – so if you do not mind licking your savings away for a period, then you should consider this option.
Another solution for those who need an incentive to save is a regular saver cash ISA – that require you to put aside a regular monthly amount and in return, pay you a higher rate of return.
Stocks and Shares ISAs – ‘Equity’ ISAs
Whilst cash ISAs are the most secure form of saving, as there is no risk, to obtain better returns, you will need to consider investing in the stock market.
You do not have to be an amateur stockbroker; an ISA provider will offer you several investment options that you can consider investing in. A reputable ISA provider will provide average historical returns on investments, complete with graphs of the fund’s performance.
A word of caution – if you decide to invest in stocks and shares you will have to acknowledge that your savings are at risk and that your investments could go up and down relating to vitality of the stock market.
Help to Buy and Lifetime ISAs (LISAs)
If you are aged under 40 and are looking to buy a house, then you can save into a government-sponsored Help To Buy: ISA that pays a bonus of £50 on every £200 saved, up to a maximum of £4,000 (so the maximum you can receive in total is £5,000). If you do not use your savings for a first time house buy, then you can keep it and save for your eventual retirement.
Please note though that the LISA forms part of your overall ISA allowance, which is £20,000 for the current tax year. Therefore, if you save the maximum £4,000 into a Lifetime ISA, you can only save a further £16,000 into a standard ISA.
Innovative Finance ISAs
An innovative finance Isa – known as an Ifisa – is an ISA that contains peer-to-peer loans instead of cash or stocks and shares.
Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers.
Moreover, because you are cutting out a bank by investing your money through an online portal – known as peer-to-peer lenders – you tend to earn higher rates of interest than a traditional savings account. Like your Cash and Equity ISAs you can save up to £20,000 into an IFISA, or have a combination of all three.
There’s much choice but don’t be intimidated; and a good ISA provider will be happy to discuss your tax-free options.
3# You can change ISA providers and where your ISA savings are held
Whether you are new to saving into ISAs or have them already, you can transfer your ISA to a new provider, to obtain more favourable interest rates from a better account. You never have to leave your money in a less-competitive account.
At the start of each tax year, banks are offering more attractive rates for new customers in the hopes of enticing them to move their ISA funds to their institution.
Please note though you must not withdraw your money to pay into a new account, or you will lose your tax-free status on the cash, and it will impact the current tax year allowance.
Instead, you will need to utilise the bank’s transfer-in service if you want to keep your savings tax-free – check to ensure your current and potential ISA providers can offer this option.
Plus, with any introductory Cash ISA rate, check when the rate ends, as once the bonus rate ends, the interest returned could be even lower. So check the date when it ends.
4# You can increase your ISA payments
By making regular payments into an ISA account, you are setting yourself up for a prosperous nest egg. Even the smallest of amounts add up over time.
Over the years the amount you can save into an ISA has steadily increased (although the 2018/19 tax year will not) meaning that if you can afford to, you can increase the amount you save each month.
If you are making payments into a Regular Saver Cash ISA then now is the time to double-check whether you can increase your standing order, or just top up with additional one-off payments. Meaning you could potentially even add a lump sum if you can afford to.
5# The sooner you start, the better
The old advice is usually the best. So start saving as soon as possible – even if it is only small amounts. With ISAs, the sooner you start, the better, because if you do not, then you will lose your annual ISA allowance.
If you do not use all of your £20,000 this tax year, you cannot transfer the remaining amount to another tax year. Only a maximum £20,000 each tax year is permitted.
For example, if you have a lump sum already saved. If you have no ISA, open one this tax year before 5th April. If you currently have an existing ISA, check whether you can pay part of your lump sum this year, and then deposit the remaining sum at the start of the next.
With making any financial investments, always talk to a financial adviser as the opinions in this article do not constitute financial advice.
David Bailey-Lauring is a small business owner and dad of three, from Brighton, UK; he writes about tech, finance and entrepreneurship.