How to get the most out of your ISA

Savers need to be careful they don't miss out on the increase in ISA allowances for the over-fifties next month.

Earlier this year there was plenty of concern about the effect that extremely low rates were having on those who rely upon the interest from savings to boost their income, with much of the sympathy reserved for the plight of pensioners.

In the year or so since the UK's economy was knocked sideways by the credit crunch, we have seen the Bank of England's base rate rapidly fall down from 5 per cent in September 2008 to its current level of 0.5 per cent, where it has stood since March this year.

Over the same period the average monthly interest rate for a £10,000 balance in an instant-access account reduced from 4.19 per cent down to just 0.88 per cent. To put that in perspective, that resulted in a fall in monthly interest from £34.91 down to £7.33 for non-taxpayers.

Against that backdrop, the Government rushed out a surprise increase in the annual Individual Savings Account (ISA) allowance from £7,200 up to £10,200. It will be phased in on 6 October 2009 for those aged 50 or over (by 6 April 2010) and from 6 April 2010 for all other ISA savers.

Presently, up to £7,200 can be invested in a stocks and shares ISA – or up to £3,600 in a cash ISA, with the option of putting the remains of the annual allowance in a stocks and shares ISA. When the increase comes into effect, up to £5,100 may be invested in a cash ISA.

The changes have stirred up something of a hornet's nest among providers, who could have done without the change being implemented during a tax year. Computer systems can't always cope with such changes and one can only imagine the bedlam that it has caused in IT departments.

Very few banks and building societies have yet revealed how they're going to deal with the October change, but there are three different types of people aged 50 or over affected by the new rules. First are those who will not, by 6 October, have used any of their cash ISA allowance – they should not have any problems in finding a cash ISA home for up to £5,100.

There is also a group of people – probably the vast majority – who have already put some money into a variable-rate cash ISA for this tax year and who should not have any problems topping up the additional allowance as well.

However, there are potential problems for a third group – those who have already used some of this year's cash ISA allowance by investing in a fixed-interest rate ISA.

Most fixed-rate offerings are for one-off lump sums and have terms and conditions that preclude further investments. If the ISA company is willing to vary that condition and permit an additional top-up, the second issue is whether the company will be offering the same fixed interest rate.

The majority of available interest rates are higher now than they were back in, say, April, so you may want a better return than that being paid on your existing fixed rate.

If you want to take advantage of the increased allowance, the first thing to do is to contact your provider to find out whether they will permit you to top up your ISA. Some may still be deciding what to do so it's possible that they may not be able to give you an answer until nearer 6 October.

If they are not willing to let you top up, it is probably worth asking whether they will waive any penalties that might have been imposed if you transfer your ISA elsewhere.

You can't open two cash ISAs for the same tax year, but if you've already opened a cash ISA this tax year you should be able to transfer it from one company to another. If you do so, remember that the correct way to do this is to fill in the forms at your intended new ISA company and then they will arrange for the funds to be transferred. Don't just withdraw the funds, otherwise you'll lose the tax-free allowance.

Clearly it's down to each saver's preference and attitude to risk as to whether they want to use a cash ISA or a stocks-and-shares ISA, but it is important to note that each year's allowance is on a use-it-or-lose-it basis. Interest rates payable on cash ISAs may look very low at the moment but, if you use each year's allowance, you will build up a tidy capital balance, which may benefit from much higher interest rates in future years.

Some savers who have invested the full amount every year in cash ISAs and their predecessor, tax exempt special savings accounts (Tessas), may, by now, have more than £50,000 shielded from tax. Even at the average cash ISA rate of 2.04 per cent, this sum would earn annual interest of £1,020 or, at the highest available fixed rate of 4.6 per cent, some £2,300.

With variable-rate savings accounts, it is worth checking regularly what interest rate you are being paid as it is possible you can get a better return by transferring to an alternative company.

Cash ISAs are no different. For example, Cheltenham & Gloucester's Cash ISA pays just 0.05 per cent gross which, for a £3,600 balance, would pay annual interest of £1.80. This 0.05 per cent rate can be easily bettered elsewhere. However, not all cash ISAs will permit transfers in from other cash ISAs and some ISAs are restricted to investments of this year's allowance only.

The tax-free status of cash ISAs means that they are even worth using by those taxpayers who cannot afford to put money away for lengthy periods and effectively need a transactional account. If that's the case make sure you pick a genuinely instant or easy access account, which does not restrict the number of withdrawals or impose any penalties.

David Black is a money analyst at Defaqto

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
people
Arts and Entertainment
Bianca Miller and Katie Bulmer-Cooke are scrutinised by Lord Sugar's aide Nick Hewer on The Apprentice final
tvBut Bianca Miller has taken on board his comments over pricing
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
PROMOTED VIDEO
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
in picturesWounded and mangy husky puppy rescued from dump
Sport
David Silva, Andy Carroll, Arsene Wenger and Radamel Falcao
football
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    SThree: Graduate Recruitment Consultant

    £20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

    Day In a Page

    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'