Where to invest your ISA allowance

Around 21 million savers can now take advantage of a new higher ISA allowance. This rule change has brought about some unseasonal activity in the cash ISA market with many new competitive deals being launched.

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If you are over 50, or will be 50 on or before 5 April 2010, your annual ISA allowance has risen from £7,200 to £10,200, half of which can be invested in cash.

Those under the age of 50 won’t benefit from the new allowance until next April. For more on what ISAs are and how they work, read our article, ‘New ISA rules explained’.

Kevin Mountford, moneysupermarket.com’s head of banking, said: “Clearly some providers are looking to maximise their share of the over-50s’ savings market, with product launches designed to coincide with the extension of the ISA limit for these savers. This is great news as some of the new deals are extremely attractive and with returns on [being] ISAs tax-free, your ISA allowance is something you should make use of.

"With increased taxes likely to become a greater burden on personal finances, any tax-free offers we get should be grabbed with both hands.”

Take advantage

If you’re 50 or over and have already opened a cash ISA this tax year, you should be able to top it up and use your extra £1,500 cash allowance – Egg is the only provider not accepting top ups.

For those who haven’t yet taken advantage of their tax-free allowance, now is a great time to do so.

The interest on ISAs is tax-free so it’s a perk well worth taking advantage of – basic rate taxpayers effectively receive a 20% boost to their annual returns, while those in the higher-rate band see a 40% uplift. A higher-rate taxpayer would need an account paying at least 5.00% in order to earn the same return as an ISA paying 3.00%, while someone in the basic-rate band would need to earn 3.75% or more.

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Kevin added: “If you haven’t used your ISA allowance yet this year, why wait until the rush in February and March? There are some competitive deals available at the moment because of the rule changes, so take advantage as you’ll benefit from an extra few months of tax-free interest.”

As with standard savings accounts, fixed rate deals are offering the highest returns. If you are prepared to lock your money away for five years, Leeds Building Society’s 5-year Fixed Rate ISA (Issue 15) is paying 4.60%.

Many savers will be reluctant to tie their money up for that long. If you’d prefer a shorter-term deal, Principality Building Society’s 3-year Direct Fixed Rate ISA (Issue 54) is paying 4.20%, while Bradford & Bingley’s two-year fixed rate eISA has a rate of 3.75%.

Fixed rate accounts are only suitable if you have a lump sum to invest (as most only allow one deposit to be made) and don’t need to access your savings for a year or two.

Making withdrawals from an ISA should always be a last resort because you lose the tax-break on that money once it is taken out of the ISA wrapper. However, if you’d prefer to retain access to your ISA money just in case, or are looking to invest your ISA allowance over the remainder of the tax year, there are easy access accounts available.

First Direct’s cash e-ISA has a rate of 3.00% which is actually fixed (until 9 November 2010) but allows unlimited penalty-free withdrawals and additional deposits. It is unusual for easy access accounts to have a fixed rate, as most are variable accounts.

Other alternatives include Intelligent Finance’s Cash ISA at 2.50%, Standard Life’s Direct ISA which is paying 2.65%, Barclays’ Golden ISA at 2.58% and ING Direct’s Cash Isa which has a rate of 2.50%.

Boost returns on your existing ISAs too

If you’ve taken out cash ISAs in previous tax years, check what rate of interest you’re currently earning. If it’s not competitive you can move your money to a new ISA paying a higher rate without losing the tax-free status.

The process is called an ISA transfer and the key thing is not to close your existing ISA account but tell your new provider that you have funds to transfer and it will arrange for your money to be moved over.

Not all ISAs accept transfers in, however, so bear this in mind when comparing deals. All the fixed products mentioned above allow transfers. Of the easy access accounts, First Direct, IF and Standard Life let you transfer money from previous tax years.

Another deal worth mentioning is Lloyds TSB’s Fixed Rate Cash ISA. Like the First Direct account, the rate is fixed but withdrawals are permitted. It pays 1.50% on balances up to £9,000 so isn’t that competitive if you are only looking to invest this year’s allowance. However, the rate is tiered and rises for higher balances. If you’ve made use of your cash ISA allowance every year since they were introduced in 1999, you could earn 3.20%, which is market-leading for an easy access account. And for balances between £21,000 and £29,999, the rate is a competitive 3.00%.

Abbey’s Direct ISA also offers a tiered rate. It pays 2.00% on balances up to £9,000 and 3.00% on balances above that, so it’s an attractive option if you’re looking to transfer money from previous tax years.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Products underlined can be applied for directly.

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