Saving your money in an ISA allows you to wrap it up away from the tax man. Your savings (subject to annual limits), are kept tax-free.
For you, this means that any profit you make on your savings through interest, bonuses or dividends, will be yours to keep. If you have a cash ISA, you keep your interest in full.
Investing in a stocks and shares ISA gives you a chance to make a bigger profit, but there are also risks involved. You should only invest in a stocks and shares ISA if you can afford not to access your money for at least five years.
Do ISAs offer the best rates of interest?
In a large majority of cases, ISAs offer the best rates for savers. However there are some other savings products with interest rates higher than the best ISAs, which can occasionally be found if you do your research and shop around. It’s sometimes possible to find 6% savings accounts, which may offer a better income on your savings even after tax is taken into account.
What about ISA limits?
It’s important to remember that you’re always subject to annual ISA allowance limits. For the 2013-2014 financial year you can deposit up to £5,760 in a cash ISA. This is an overall deposit limit. If you withdraw money during the year, then it can’t be replaced. That’s something that you need to consider if you’re choosing a standard savings account over an ISA.
If you spend two years saving a total of £10,000 in a standard account that offers a higher rate of interest than any ISA currently available, but find that rates drop for you and that ISA rates have improved, you can’t transfer the full £10,000 to a new ISA. This year, you’d be able to put £5,760 of that money into your ISA but would be unable to save the rest tax-free unless you were willing to invest it in a stocks and shares ISA. Even those are subject to limits – this year your total ISA allowance is £11,520. Consider starting your ISA account now, and contributing the maximum amount each year. You could then be saving more than £100,000 down the line, with tax-free interest at a high rate. For every year you delay investing in an ISA, you’re losing out on that year’s allowance.
Should you invest in a pension?
Whilst an ISA is generally considered to be the best short-term saving solution, if you’re preparing for retirement then you should also consider a pension fund. These are also tax-free, whilst you’re saving your money.
When you put money into an ISA, you don’t reclaim the tax you paid when you earned it. When you invest in a pension fund, you can reclaim that tax. However, you’ll pay tax on your pension fund when money is taken out to purchase an annuity. Adding a further factor, you can take up to 25% of your pension fund as a tax-free lump sum. As you didn’t pay tax on this money originally, this means that the money you withdraw as a lump sum has been completely tax-free from start to finish.
Financially, the result of saving your money in a pension fund instead of an ISA can be considered fairly minimal. Yet, that’s only the current situation. Annuity rates and pension rules are regularly changing, and if you’re some way from your retirement then there’s no guarantee what will have happened by the time you get there.
Is an ISA your best option?
Evaluating your personal circumstances, including whether or not you’re a higher-rate taxpayer, will give you a clearer idea of which option might be best for you. For most, it will be an ISA. Your money isn’t subject to spending restrictions, and you’re likely to end up with about the same amount of money to use during your retirement. If you’re not saving for retirement, then your ISA allows you access to your money whenever you need it. It’s the best way of saving for the short-term.
Best Price Financial Services can help you to invest in stocks and shares ISAs if you’re comfortable taking a risk with your money. Alternatively, you can compare annuity rates online for one flat rate rather than a percentage-based commission, saving you a great deal of money in the long run.