Each tax year, UK savers are given an ISA allowance. This enables us to shelter our savings from tax, and save more for our future. This year’s ISA allowance is £20,000 but it appears amid a very different savings landscape.
We now have:
- A personal savings allowance of either £500 or £1,000 depending on how much income tax you pay.
- A flexible ISA which can be topped up and withdrawn from in the same tax year.
- Record low interest rates, the base rate is now 0.25%.
Here’s how to make the most of your allowance in light of the changes we’ve seen so far this year.
Make sure your ISA is flexible
A flexible ISA means you have more control over your savings. You can top-up and withdraw from your ISA in the same tax year, without impacting your ISA allowance. That means you can confidently put a little away each month, knowing that should you have an emergency and you need that money in a hurry you can get to it without losing your tax benefit.
But savers and investors beware, not all ISA providers are offering flexibility, especially in the stocks and shares ISA market. Check the charges and terms on your ISA to ensure you can access your money as and when you need it.
Your ISA needs to offer strong returns
The interest rate set by the Bank of England is now 0.25%; this is a new low for the UK and many of the Banks are following suit. Research from the Financial Conduct Authority showed that some cash ISA providers are offering as little as 0.1% in returns to customers. This would mean there is no tax benefit to your ISA.
To make your ISA worthwhile you need to be getting at least 3% interest or you may as well keep it in a normal savings account where you’ll benefit from the personal savings allowance.
Shelter any other savings
Very few savers in the UK are able to save £20,000 every year. But this larger ISA allowance gives us the opportunity to move our savings around. Make sure you make the most of your tax allowance, and keep as much of your returns as possible by moving your savings into an ISA.
Inflation has recently increased to 0.6% and leading economists now think that it will average 2.6% over the next five years. That means you need to achieve returns of 2.6% to keep the real value of your money the same.
According to Money Saving Expert the best cash ISA rate is currently 1.7%, meaning your money will devalue over the next five years. Whilst volatility risk comes with investing, and you’re likely to see the value of your savings go down as well as up trends suggest investments will outperform cash over time. The Barclays Equity Guilt survey shows that you have a 75% chance of investments outperforming cash if you invest for five years.