Should you open an ISA now?

Published:
06 February 2013
Topic:
News,Money,Savings

There are just two months to go until the end of the tax year on April 5, so if you have yet to use this year's ISA allowance, act now or risk losing it for good.

According to research by MoneySupermarket, one in three of us have yet to make the most of this year's allowance, despite the fact that any interest earned on money held in ISAs is tax-free.

You can invest up to £5,640 in a cash ISA this tax year, and the same amount in stocks and shares, or you can invest the full £11,280 allowance in stocks and shares. Either way, if you haven't used your allowance by April 5, it will be lost forever.

Kevin Mountford, head of banking at MoneySupermarket, said: "People who are in a position to be able to save at the moment need to do everything in their power to maximise their savings pots. If they are taxpayers, they should use as much of their ISA allowance as they can afford to make sure that interest earned is not unnecessarily lost to taxation.

He adds: "Historically, we have witnessed some savers waiting until the end of the tax year for potential last minute rates from providers, but this means they could miss out on additional interest on savings in the meantime."

Here, we look at some of the best ISAs currently available for those looking to protect their savings from the taxman as soon as possible...

Top ISA accounts

Rates on many cash ISA accounts have tumbled in recent weeks, along with other savings rates, but there are still some competitive deals to be found if you know where to look.

The current market-leading variable rate ISA is Coventry Building Society's 60 Day Notice ISA, which pays 2.80% AER on a minimum investment of £1. However, as the account's name suggests, you will need to give 60 days' notice every time you make a withdrawal.

Cheshire Building Society's ISA Saver account is also well worth a look, paying 2.50% tax-free on a minimum investment of £1,000. Unlike the Coventry account, this account does accept transfers from cash ISAs opened in previous tax years.

If you are an existing Barclays' customer, you may want to consider the bank's Loyalty ISA. This can be opened with a minimum investment of just £1, and the rate is guaranteed to track 1.76% above the Bank of England base rate for 12 months, giving a payable rate of 2.28% tax-free. This rate includes a fixed 0.25% bonus for the first year, so you may want to move your money at the end of this period. This account does not accept transfers in from existing ISAs.

However, Nationwide Building Society's Web ISA, which is only available to Nationwide card account customers, does accept transfers and pays 2.00% tax-free. However, you do need a steep minimum deposit of £10,000 to open this account.

Fixed rate ISAs

If you can afford to leave your money untouched for a while, you may want to consider a fixed rate ISA, otherwise known as a FRISA. The current market leading 5 year FRISA is Halifax's ISA Saver Fixed account, which pays 2.50% tax-free on a minimum investment of £500. However, you must be certain you can afford to tie your money up for this long, as no additional deposits or withdrawals are allowed during the fixed term.

If you'd rather only lock up your savings for 3 years, BM Savings is currently paying a market-leading 2.80% on its three year Fixed Rate ISA, but you need a hefty £50,000 to open this account. If you don't have that much to invest, then Halifax's 3 Year ISA Saver Fixed account pays 2.40% tax-free on a minimum investment of £500. Halifax also offers a 4 Year ISA Saver Fixed account paying 2.45% tax-free, again on a minimum investment of £500.

For those who are only prepared to tie up their money for the short-term, Nationwide Building Society pays 2.05% tax-free on its 1 Year Fixed Rate ISA, which can be opened with a minimum investment of £1. Halifax pays the same rate on its 1 Year ISA Saver Fixed account, which can be opened with £500.

ISA savers with small sums to invest

You may think it isn't worth investing in an ISA because you barely have any savings, but many accounts can be opened with £1 or more and saving anything is better than putting nothing away.

For example, Coventry Building Society's aforementioned 60 Day Notice ISA paying 2.80% tax-free only requires a minimum investment of £1. 

Scottish Widows Bank's E-Cash ISA pays a lower rate of 1.80% tax-free, but can be opened with a minimum investment of £10 and allows unrestricted free withdrawals, so you can get your hands on your cash whenever you want.

BM Savings ISA Extra Issue 4, meanwhile, which pays 1.35% tax-free, can be opened with £1, and again allows unlimited withdrawals. This rate includes a 0.85% bonus for the first 15 months, so you may want to move your money at the end of this period.

Kevin Mountford said: "Some households may find they're not currently in a position where they can save regularly. There are some things that you can do to try and free up cash for the family budget and take a step towards being able to save in the future. Try and take some time to review all of your major household bills, especially your energy and your insurance arrangements.

"If you've never switched these, you'll find that you can save hundreds of pounds. If you're not able to save now, but you have savings from previous years in old bank accounts, it is still worth opening an ISA and moving your money. You're likely to get a better rate of interest, and the interest you earn will be protected from the taxman."

All rates are correct at the time of writing, though you can check MoneySupermarket's ISA channel for up-to-date leading deals as and when they launch.

And to swot up in more general terms about these tax-free savings accounts, read Esther Shaw's article, Every ISA question Answered.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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Melanie Wright

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Financial journalist

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