Used up your ISA allowance? Where to save next

If you’ve already used up this year’s cash individual savings account (ISA) allowance, but still have some savings left to invest, it isn’t always easy to know where to turn.

There is a huge choice of financial products available, and some of the jargon surrounding them can be baffling. Here, we take a look at your options if you have used up your ISA allowance but still have cash to stash.

Stocks and shares ISAs

If you’ve got an appetite for risk, remember that as well as the £5,760 you’ve already invested in your cash ISA, you can also invest the same amount in a stocks and shares ISA this tax year. 

Historical evidence shows that over long-term periods, stocks and shares outperform cash accounts, so this option is well worth considering if you can afford to leave your savings untouched for five to 10 years.

Remember that you aren’t restricted to holding just funds in your stocks and shares ISAs, you can also hold individual shares, investment trusts, corporate bonds, gilts and exchange-traded funds (ETFs) in an ISA. If you aren’t certain which investments are right for you, then you should seek professional independent financial advice. An adviser can help you build an investment portfolio to suit your risk profile and financial objectives.

Even if you are confident about going it alone, you should still never rush in to investing in stocks and shares. While you still have time to invest your full ISA allowance for this tax year, which ends on April 5, you should take your time to decide where to put your money.

Current accounts

Many current accounts now offer higher rates of interest than savings accounts, and can therefore be a great option if you don’t want to take any risks with your money, and if you want to be able to make regular withdrawals.

Santander’s 123 account, for example, pays a market leading 3.00% AER on balances between £3,000 up to £20,000, and you also get cashback on your household bills. You do however, have to pay at least £500 a month into the account, and there is a £2 monthly fee.

Savers who don’t have as much as £3,000 to invest may want to consider Nationwide Building Society’s FlexDirect account instead. This pays an impressive 5.00% AER on balances between £1 and £2,500, and there is no monthly fee. The rate only applies for the first 12 months though, and you will need to pay in a minimum of £1,000 each month to qualify.

Another option worth considering is Clydesdale Bank’s Current Account Direct, which pays 4.00% AER on balances between £1 and £3,000 until March 2015. Again, you will have to pay in £1,000 minimum monthly funding.

Peer-to-peer lending

Peer-to-peer lending websites have soared in popularity in recent years. Savers agree to lend to individuals or small businesses at lower rates than borrowers would typically be offered by high street lenders, and in return earn better rates of interest than they would achieve if they put their money in a standard savings account.

For example, RateSetter is currently offering a 2.10% average net return on its Monthly Access account, which requires a minimum investment of £10, while Wellesley & Co is offering a rate of 3.79% on its six-month term account, which can again be opened with a minimum investment of £10. Both these rates are the expected annual equivalent rates (AER) after fees and bad debt have been deducted.

Unfortunately, peer-to-peer savings cannot yet be held in ISAs – though there is a possibility this might change. Returns are still currently paid without any tax being deducted, so if you are lending as an individual you will need to declare any interest and gains to the HM Revenue & Customs (HMRC) on your self-assessment tax return, or inform your local tax office.

You can find out more about what happens to your money when you invest in peer-to-peer with Laura Howard’s article.

Remember too that any money invested in peer-to-peer lending schemes is not covered by the Financial Services Compensation Scheme (FSCS), which offers financial protection in the event that providers go bust. However, most peer-to-peer lenders have provision funds in place which are designed to cover any losses suffered as a result of borrowers not paying back what they owe.

Structured products

Structured products combine capital protection with the opportunity to receive returns which are linked to the performance of the stock market, usually the FTSE 100 Index. They are generally more complicated than standard savings accounts and with some there is a risk you could get back less than you put in, so always read the small print carefully before investing.

Structured bonds run for a fixed term, usually between three and six years, and either offer investors income or growth.

For example, the Investec FTSE 100 Target Income Deposit Plan 10, which has a six-year investment term, offers a potential annual income of 4.85% (gross). The FTSE 100 Index is measured at the start of the plan, and, if its closing level for the five business days up to and including the anniversary date is higher than 90% of the initial index level, you will get a fixed return of 4.85%. If the FTSE is equal to or lower than this, then you won’t receive any income that year.

However, if the Index meets the required level on any future anniversary, any previously missed income payments will be added back and paid out. You must hold the plan for the full six-year term and the minimum amount you can invest is £3,000.

Don’t forget next year’s ISA allowance!

Remember also that, from April 6, 2014, you will have a fresh new ISA allowance available to you of £11,880 half of which (£5,940) can be held in a cash ISA. Unfortunately, returns are low across the board so make sure you shop around for the best deal and don’t forget to look at your own bank too in case it is offering special rates for existing customers.

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