Deadline looms for ISA allowances
Sunday 25 March 2012
Savers are now on the home stretch with the 5 April end of tax year deadline less than a fortnight away. After that date this year's tax-free individual savings account (ISA) allowance is lost for good.
Cash ISAs are big business for banks and building societies, and the past few weeks have seen a full-blown ISA rate war break out as providers jostle for position at the top of the best-buy tables.
At the last count by data analyst Defaqto there were 377 cash ISAs available from 95 different providers. Some table-topping accounts held the No 1 spot for just a matter of days before being kicked into second place by another new launch.
Rules and limits
Experts are always keen to push the virtues of ISAs and their tax-free status, unlike normal savings accounts where tax is payable on interest.
All adults over the age of 16 can save a total of £5,340 in a cash ISA for the year 2011-12. The allowances go up for next year's ISA allowance; from 6 April you'll be able to save £5,640 a year in a cash ISA.
But despite the tax benefits, research repeatedly shows that savers aren't making the most of ISAs. Comparison site uSwitch.com has found that only half of Brits intend to save into a cash ISA before the end of the tax year with only a quarter of savers making full use of their ISA allowance.
Michael Ossei, personal finance expert at uSwitch.com, says: "If savers don't know the ABC of investing in an ISA they could be missing out on maximising the tax efficiency and maximising the return on their money. This means they will be losing out."
The rules state that you can only contribute to one cash ISA per tax year, so it's important to pick carefully. Savers have a plethora of products to choose from; easy-access accounts with introductory bonuses, variable rates, and short and long-term fixed rates. Some accounts also allow you to transfer money held in an existing ISA for better returns.
Easy or instant-access cash ISAs do exactly as the name suggests and give you easy, penalty-free access to your money.
The best account this year is the AA's Internet Access ISA (issue 3) which pays 3.5 per cent. But watch out for the small print: transfers from previous years' ISAs are not allowed, and the eye-catching rate includes an introductory bonus of 3 per cent for a year, meaning that in April 2013 it will fall to just 0.5 per cent annual equivalent rate (AER).
Most of the best easy-access accounts this year include an introductory bonus for just 12 months. For example, the rate on Santander's Direct ISA Issue 9 drops from 3.3 per cent to 0.5 per cent in a year's time.
Cheshire building society is offering a rate of 3.35 per cent for longer – 18 months – with instant access, but after that the rate falls to 1 per cent.
Another small print clause to look out for when choosing an ISA is the minimum opening deposit. The AA's Internet Access ISA requires you pay in at least £2,500 to get started, as does Santander's Direct ISA.
If you're just starting to save and don't have a lump sum, Halifax's ISA Saver Online pays 3 per cent (including a 12-month bonus of 2.75 per cent) and has a minimum £1 deposit, as does ING Direct's Cash ISA which pays 3 per cent guaranteed for a year.
Whether an account allows transfers in from previous years' cash ISAs is a big issue. Someone who's saved the maximum in a cash ISA each year since the accounts were launched in 1999 would have a pot of £39,300 plus interest of up to about £16,000. Yet some older ISA products pay as little as 0.1 per cent AER.
MoneySupermarket's Kevin Mountford suggests those with older ISA funds check their current rate and switch to a better deal if necessary.
"It is now very easy to transfer an ISA with many providers paying interest immediately, even before the funds have arrived in the account. However, make sure you follow the ISA switching rules otherwise your savings could lose their tax-free status," he says.
Yet many new ISAs – such as the AA's best-buy easy-access account – only allow the current year's allowance to be saved.
The best easy-access ISAs allowing transfers in are Santander at 3.3 per cent, Aldermore's 60-day notice account at 3.15 per cent and Nationwide at 3.1 per cent, although you'll need a Nationwide card-based account to be eligible for the latter.
Fixed-rate ISAs mean tying up your money for a certain period of time. Rates are generally better on fixed rates than easy-access accounts.
Although fixed-rate ISAs give savers certainty, a potential downside is that they won't be able to access their money penalty-free and could miss out on higher rates which later become available.
This year Halifax is leading the way with fixed ISA rates. Its five-year fix pays 4.5 per cent, four years 4.35 per cent, and three years 4.25 per cent. All the accounts allow transfers in from previous years.
If you want to commit for less time, Santander has a two-year fixed ISA at 4 per cent with a bonus 0.1 per cent paid at maturity if Rory McIlroy wins an eligible golf major.
Fixed vs variable rates
Fixed rates have paid higher interest than variable-rate ISAs over the past few years.
Whether they will continue to be a better option largely depends on what interest rates do in the next few years. If the base rate stays at 0.5 per cent until 2014 as widely predicted, we'll be unlikely to see any eye-catching, instant-access rates before then so a fix could be a good plan.
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Energy switching app Voltz allows users to switch with just a few taps
Money Insider: Smart alternatives to the pensioner bond
Number of serially under-performing investment funds has increased by a fifth, survey reveals
Bank-beating exchange rates on your international payments
- 1 Benedict Cumberbatch says Hollywood is better for black British actors
- 2 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
Nigel Farage: NHS might have to be replaced by private health insurance
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
George Galloway condemns 'racist, Islamophobic, hypocritical rag' Charlie Hebdo at freedom of speech rally
British Muslim school children suffering a backlash of abuse following Paris attacks
Islamic history is full of free thinkers - but recent attempts to suppress critical thought are verging on the absurd
iJobs Money & Business
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village