How to make the most of your ISA allowance


ISA rates have been increasing recently, thanks to renewed competition amongst providers. So, with tax year end fast approaching, there is still time to take advantage of your 2018/2019 annual ISA allowance.

While few savers will have the full £20,000 to put away in one go, by opening an account now, you could put yourself in a better position for the new tax year ahead.

Basic rate (20%) and higher rate (40%) tax payers have a Personal Savings Allowance (PSA) effectively allowing them to earn interest up to £1,000 (basic rate)/£500 (higher rate) without paying tax on it. However, the reality today is that a basic rate tax payer would need more than £66,000 in one of the top paying easy access accounts just to meet the limit, meaning ISAs can be a very attractive option to consider as part of your overall investment strategy.

There are several different ISA accounts you can choose; which one suits you best will depend on your appetite for risk, how regularly you want to access the money and what your long-term financial goals are. You can split your annual allowance between different types of ISA but not into more than one of the same type of ISA in the same tax year. Here are some of the options below.

Cash ISA

Not dissimilar to a regular savings account, an easy access Cash ISA will allow you to withdraw the money whenever you want to. Alternatively, you can lock the money away in a fixed rate account, which limits access to your money but may pay a higher rate of interest – be careful to check for any penalties if you do need to take the money out sooner than expected.

There are also regular saver cash ISAs that incentivise regular monthly payment in the form of slightly higher interest rates – while some cap the amount you can save each month, others sometimes increase the amount you can pay in and even allow you to carry over any unused monthly allowance, meaning you could either increase payments or make an additional lump sum deposit.

Stocks and Shares ISA

Rather than keeping your savings in cash, you can choose to invest them in the stock market. If you are viewing ISAs as a longer-term investment solution of at least 3 to 5 years in duration, then this kind of ISA could be a better route to achieving your goals as there is the potential for higher returns. However, they also come with far greater risk so you could get back less than you invested.

Help to Buy ISA

The Help to Buy ISA allows you to make a maximum contribution of £200 per month, plus a one off deposit of £1,000 when the account is opened that won’t count towards your monthly allowance. The government then adds a 25% bonus, up to a total limit of £3,000, which is paid when you withdraw the money to purchase a property. They can be opened until 30 November 2019 and contributed to until 2029. There is no penalty for making a partial withdrawal prior to purchasing a property, but it would result in a proportionate loss on the interest due to be paid.

Lifetime ISA

The Lifetime ISA can be also be used to save for your first home but has the added flexibility of being available as a vessel to put money away as a pension for later in life. There is no limit on how much money you can save each month, as long as you don’t exceed the yearly cap of £4,000. You can only pay into the account until the age of 50 and you will have to repay the 25% government bonus if you withdraw the money unless it is to buy your first home or you are aged 60 or over.

While it may seem daunting making the right decision about which product to choose, particularly if you are new to investing or short of time ahead of tax year end, you can always transfer some or all your current ISA pot into a better account. Be sure to check that the new ISA you are looking at accepts transfers in and be sure to check for any charges that may apply. Also be sure to use the bank’s transfer-in service as opposed to withdrawing the money yourself and paying it into a new account – this would mean you lose the tax-free status on the cash and it will count towards the current tax year’s allowance (meaning the deposit amount will have counted twice against your allowances).

By keeping as much as you can in an ISA, it remains tax free for life, regardless of what happens to saving rates or if the PSA rules change in the future.

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