New Individual savings accounts (NISAs) are tax-free, so they should be your first port of call if you are looking to kick-start the savings habit.
This tax year (2014/5) you can put up to £15,000 into a NISA. Before July 1, 2014, the most you could invest was £11,880.
Previously, the amount you could save in cash was capped at half the ISA allowance, but you can now hold the full £15,000 in cash if you want to.
If you have yet to use this year’s NISA allowance, you’ve got until April 5, 2015 to make the most of it. If you don’t use your allowance by this date, it will be gone for good, as you cannot carry any allowance which you haven’t used over to the following tax year.
Don’t wait until the very end of the tax year to invest either, as you will miss out on valuable tax-free returns. For example, if you had invested the maximum £5,670 cash allowance at the time on April 6, 2013, into an ISA paying 3.00%, by the start of the following tax year on April 6, 2014, you would have earned a respectable £172.80 in interest.
However, if you’d waited until the end of the tax year, and invested the same allowance on March 6, 2014, you’d have earned just £14.21 in interest by April 6, 2014.
Junior ISAs (JISAs) work in a similar way as adult accounts except they are specifically for children, and enable mums and dads to save on their offspring’s behalf tax-free.
Parents can choose from stocks and shares JISAs, where your money is invested in the stock market, and the less risky cash JISA which is basically a tax-free savings account. This tax year you can pay up to £4,000 into a Junior ISA – this allowance was boosted from £3,840 on July 1.
Remember that the account will be held in your child’s name, so only they can get their hands on the money. They will not be able to do this until they reach the age of 18, although they can choose to manage the account themselves once they reach 16.
Different kinds of NISA
Cash NISAs work in the same way as standard savings accounts, except that returns are tax-free.
If you choose a variable rate account, then the interest you earn can change over time. Be aware too that many variable rate NISAs include an introductory bonus in the rate, which usually disappears after the first year. If you find your interest rate suddenly plummets, you should consider transferring your savings into an alternative better-paying NISA.
With a fixed-rate cash NISA, however, the interest rate won’t change during the term of the account, and you can often earn more than you could if you put your money into an easy access NISA.
However, fixed rate NISAs don’t usually allow withdrawals, so you’ll need to be sure you can afford to lock away your money for a year or more, depending on the account term. As a general rule, the longer you are prepared to leave your money untouched, the higher the rate of interest you will earn.
Alternatively, if you have a strong stomach for risk, you might want to think about putting your money into a stocks and shares NISA instead. Bear in mind that stocks fall as well as rise, so you could end up getting back less than you put in. Historically, however, stocks and share tend to outperform cash accounts if you’re investing over a long-term period.
There are numerous different investment funds to choose from, so if you aren’t certain which funds to pick, you should speak to an Independent Financial Advisor (IFA) who will be able to make some suitable recommendations. However, you will have to pay for this advice. It's usually a good idea to pick a variety of investment funds to help spread the risk.
Finding the best deal
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