Use it or lose it – and how to beat the ISA blues
Amid the savings rate wreckage, Kate Hughes looks at the best tax-free deals before the end of the financial year
Sunday 29 March 2009
You have a week left to protect your money from the taxman. The individual savings account season is reaching its climax and some people will now be rushing to wrap their cash in tax-free ISA protection. But if, like thousands of others, you've left it to the last minute, what should you think about when choosing your cash ISA
Every UK national over the age of 16 can save up to £3,600 in one of these accounts each financial year – hence the rush to make arrangements for 2008-09 before 6 April.
Sadly, the average interest rate you can earn on your savings this year will not set the pulse racing. With the Bank of England base rate at just 0.5 per cent, the average cash ISA offers just 2.09 per cent. That's substantially down from 5.31 per cent this time last year when the base rate was 5.25 per cent, and less than half the average 4.52 per cent rate offered in 2006 when the base rate was 4.5 per cent.
David Black, banking consultant at research firm Defaqto, says: "These deals don't take into account the latest base rate cut earlier this month. Next week, as we go into April, I would expect those rates to drop to an average of around 1.9 per cent."
So you will have to search hard for a good deal and, with over 230 different cash ISAs to choose from this year, the range is daunting.
There are two basic types of cash account – those where you can gain access to your money instantly, and ISAs that specify fixed terms or notice periods before you can get your hands on your cash.
Of the instant access accounts, the Barclays Golden ISA currently offers 3.61 per cent, NatWest 3.51 per cent and Abbey 3.5 per cent.
But many of the top-notch rates include introductory bonuses, usually of an extra 1 per cent, in order to come near the top of the "best buy" tables, The bonus disappears after 12 months. The Barclays deal, for example, includes a 1 per cent bonus, and Abbey's offer includes a 2 per cent introductory incentive. Savers should review their accounts, and the variable rates, on a regular basis, particularly at a time like this when deals are being squeezed.
"In general, ISAs offer standard savings account features but with the added benefit of a tax-free wrapper," says Kevin Mountford, head of savings for price-comparison site Money-supermarket.com. "This means that you need to look out for the same pitfalls you would normally – in particular, short-term bonus rates and limited access to money".
Of the top fixed-rate deals on offer, Principality building society is offering a two-year deal at 3.30 per cent, while Nationwide's top offer is 3.25 per cent for three years. Elsewhere, locking your money away for five years will earn you 3.5 per cent from Leeds building society.
"It could be worth fixing for one or two years," says Mr Mountford, "but that's really as far as you can go without losing out in future. Meanwhile, if the product is fixed or offers a bonus then when this matures or ends, savers should check the default rate to ensure they maintain the best return possible."
Keeping a close eye on rates is particularly important for those who have built up several years' worth of ISA savings, he adds, while those moving cash between ISAs must be careful to make the transfer directly, rather than shifting the money temporarily into a regular bank account. This would mean the money no longer has the tax-free wrapping.
But in spite of the complexities and the low rates, experts suggest cash ISAs are must-have products. "They are for such a relatively small amount that even if you just use them as tax-free places to park your emergency savings, it's worth it," says Peter Chadborn of independent financial adviser CBK Colchester. "There are few reasons why a cash ISA wouldn't be appropriate and almost everyone should have one, even if they are just putting a few pounds in there, because they'll save either 20 or 40 per cent of the interest earned by wrapping it up out of the grasp of the taxman."
And once you've exhausted this year's £3,600 limit, there are other tax- efficient savings options out there.
National Savings & Investments, backed by the Government, offers a range of tax-free certificates for savings of between £100 and £15,000, and these don't affect your ISA allowances. For example, index-linked savings certificates track the retail prices index, plus 1 per cent, and you can invest for three or five years, or both.
Alternatively, fixed-rate savings certificates, held for two or five years, currently offer up to 1.9 per cent annual interest. Premium bonds, which offer savers the chance to scoop a tax- free prize rather than receiving interest, are also a handy way of sheltering money from the taxman.
"NS&I offers savers plenty of security, but you have to keep an eye on the rates," says Mr Chadborn. "They tend not to fluctuate as much as bank rates, so sometimes they will be more attractive than the rest of the market, and sometimes they won't. These are also good options for those who aren't comfortable with internet banking as you can access them via your local post office."
And that's not all. Few people are aware that friendly societies, of which just a few dozen remain, can also offer small-scale tax-free savings plans that again don't affect your ISA allowance.
Foresters friendly society's tax-exempt savings plan is open to children and adults saving between £10 and £25 a month for 10 to 25 years, and pays a lump sum exempt from income or capital gains tax at the end of the term. The underlying investment is, in fact, in the society's with-profits fund, so bonuses are intended to be added every year to the sum assured, with the possibility of a final bonus payout.
But be warned that, particularly in this economic climate, there is no guarantee you'll get a bonus, as recent with-profits scandals have demonstrated. For more information, go to www.forestersfriendlysociety.co.uk, or for a list of societies go to www.afs.org.uk.
Will your credit card rewards be scrapped following new EU rules on charges?
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
General Election 2015: How you vote next week could affect your finances
Motorists will need a code to hire a car abroad
- 2 How the language you speak changes your view of the world
- 3 Russell Brand backs Ed Miliband: 'You gotta vote Labour'
- 4 General Election 2015: 14-year-old boy asks Nick Clegg – 'can you kill Katie Hopkins?'
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
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 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