Saving into a ISA isn’t the most exciting thing to do with your cash, but it’s a good way of sheltering money from the taxman. We looks at how to get the best one for you
Individual Savings Accounts (ISA) are one of the most generous ways to save today. And they just got more attractive with the new annual allowance rising to £20,000.
Each tax year starting April 6, you can open a new ISA and save cash or invest in stocks and shares or do a combination of both. You can now choose how you split your annual allowance too. For example, you could choose to save £15,000 in cash and £5,000 in stocks and shares or put it all into cash or all into stocks and shares.
You pay no income tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax (CGT).
ISAs are now more flexible, too, thanks to a recent rule change that allows you to withdraw and replace money without it affecting your yearly allowance, provided it takes place within the same year. In the past, if you took money out of your ISA and then replaced it at a later date, the money you put back in reduced your allowance for that tax year.
Currently two thirds of over-50s have a cash ISA while four in ten hold a stocks and shares ISA.
Whether you choose cash or the stock market will depend on your investment risk attitude. But if you’re struggling with low savings rates and don’t mind taking a little risk with your money in the short term for a longer-term gain, switching to a stocks and shares ISA could help boost returns.
If you already have older ISAs, check they’re still earning a decent rate. If they aren’t, switch. But don’t just withdraw your money and pay it into a new ISA because it will lose its tax-free status. Ask your bank to do an ISA transfer instead. Current best buys include Virgin Money which currently pays 1.01% on its easy access ISA and also has a one-year fixed ISA paying 1.05%.
Little and often
You don’t need to be pay lump sums into your ISA. With a stockmarket ISA, it makes sense to drip feed your money in regularly so you can benefit from stockmarket ups and downs, giving you a better chance of buying more for your money on down days. Set up a monthly contribution so it becomes a standard outgoing. And if you don’t think you have spare cash to save, cut-out caffeine! Fidelity International says you can boost ISA savings by £50 a month or £3,091 over five years simply by ditching shop-bought coffee!
Inheriting an ISA
ISA assets can now be passed onto to spouses or civil partners after death and retain their tax-friendly status. If your partner died on or after December 3, 2014, you’ll receive an additional ISA allowance equal to the value of their ISA savings at the time of their death. For example if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £70,000 (the value of your own partner’s savings and your own ISA allowance for the 2017/2018 tax year which is £20,000). Contact your partner’s ISA provider for details.
ISA vs pension
If you already have ISA savings by the time you’re 50, consider putting money into a pension instead. You’ll get tax relief on your contributions and only be locking away the money until you get full access to your pension pot at 55. Experts say we need to stop thinking of a pension as something that’s just for retirement and as the most tax-efficient, flexible investment that’s open to Britons which can be accessed at least a decade before you’ll receive your state pension.
- Words Yours money editor Sarah Jagger
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