Millions of savers leave it until the last minute to use their annual ISA allowance, but the early birds effectively benefit from earning an extra year’s tax-free interest or growth on their investment - so it’s well worth getting ahead.
What’s more, this year you have the added advantage of being able to shelter even more from the taxman. The amount you can invest in an ISA has risen from £7,200 to £10,200 (those aged 50 and over benefited from this higher allowance last year).
And for top earners, ISAs are now even more attractive due to the new tax band – anyone earning £150,000 or more will now pay 50% income tax. Returns on ISAs, by contrast, are tax-free.
Where can I invest my money?
You can invest your entire ISA allowance in a stocks and shares ISA. Alternatively, you can split your allowance and up to half - £5,100 – can be saved in a cash ISA.
For more information on how ISAs work, read our article ‘New ISA rules explained’.
One advantage of opening an ISA at the start of the tax year is that you don’t have to have a lump sum to invest. Instead you can put money away monthly and use your ISA allowance over the course of the year. This can be useful if you aren’t very good at putting money into a savings account as it can get you into the habit.
It is also good for those wanting to invest in an equity ISA as you don’t have to worry about timing the market: because your money is ‘dripped’ into the market on a monthly basis the number of shares your investment buys you will vary as share prices move up and down. If share prices fall, it’s not so much of a worry because you’ll be able to buy more.
Early-bird ISA investors
To mark the start of the tax year and to try and capitalise on the early-bird savers, a number of savings providers including Santander, Marks & Spencer Money and Principality and Leeds building societies have launched new cash ISA deals.
If you’ve only recently opened a new cash ISA you may be able to put this year’s allowance in to it as well, assuming it is still open to new customers. The Santander Flexible ISA for example, was paying a market-leading rate of 3.50% and was therefore hugely popular. That rate is no longer available though so you won’t be able to invest more money into it – instead Santander has launched the Flexible ISA Issue 2 which is paying 3.20%.
So which are the leading cash ISA accounts?
If it’s an easy access account that you’re after, Santander’s Flexible ISA offers the highest rate at 3.20% (this product is also available under the Alliance & Leicester brand). Next best is Barclays’ Golden ISA which is paying 3.10%. However, these deals are only available for this year’s ISA allowance – you can’t transfer funds for other cash ISAs that were invested in previous tax years.
If you have money languishing in cash ISAs that are no longer paying a competitive rate and want to transfer it to a higher-paying account, Alliance & Leicester’s Direct ISA Issue 6 is paying 2.75% on balances of £9,000 or more (this product is also available under the Santander brand). If you bank with Nationwide Building Society you’ll qualify for its eISA, which is also paying 2.75% and accepts transfers in.
You can earn a higher return though if you have money you can afford to lock away for a few years. Clydesdale and Yorkshire Banks (both part of the same group) are offering five-year fixed rate ISAs at 5.00%. You can transfer money from existing ISAs as well but you won’t be able to access your savings during the fixed term. Locking into a five year account may therefore be too long for some people.
The rates are lower on shorter-term deals but you can still get higher than those on easy access account. Halifax’s Two-year Fixed Rate ISA Saver for example, is paying 3.50%. It accepts transfers in as well as this year’s ISA allowance.
What about stocks and shares ISAs?
If you want to open a stocks and shares ISA there is a huge choice of where you can put your money as there are literally thousands of investment funds you can opt for. It’s therefore worth taking time to do some research before deciding where to invest.
Our articles ‘What you need to know about stocks and shares ISAs’ and ‘Ten laws for first time investors’ may help if you’re unsure where to start.
If you go for an index tracker fund (the performance of which, as its name suggests, will mirror the stock market index it is tracking, say the FTSE 100 or FTSE All Share) there will be no initial charge to get into the fund. However, if you decide on an actively managed fund, which will be run by a fund manager, you could pay as much as 5% just to invest. But in many cases you can bring this cost down – sometimes to zero – if you use a funds supermarket or discount broker such as Hargreaves Lansdown or Torquil Clark.
Don’t forget about your existing ISAs
It’s easy to focus on your new ISA and forget about the money you invested in previous tax years but it’s important to monitor how your other ISAs are doing.
The rates on cash ISAs tend to become less competitive over time. If you opened a cash ISA in the run up to the end of the 2008/2009 tax year, the rate may well have included an introductory bonus that is about to end (if it hasn’t done so already) so it could be time to move your money.
You can transfer money from one cash ISA to another without losing the tax-free status on it, although not all accounts accept transfers in so bear this in mind when you’ve comparing deals.
The same goes for stocks and shares ISAs. If you invest in equities you have to be prepared for the value of your investment to rise and fall. However, you need to look at how your funds are performing in relation to other funds in the sector. If the manager of your fund is underperforming, consider switching to an alternative fund. Again, as with cash ISAs, you can do this without affecting the tax status of your investment.