We spoke to James Hillon, the ISA expert at the Co-Operative Bank, to find out why it makes sense to save into a cash ISA and how to find the right account for you…
Why should I save into a cash ISA specifically?
James Hillon: Well, because of the tax benefits you get from doing it. So, no-one wants to pay anymore to the taxman than they have to, and an ISA offers a great way to save your money in a way that minimises the amount you’re paying to the taxman.
FH: James is right, it makes no sense paying the taxman a penny more than you need to, so using up your ISA allowance is a must for savers. You can save up to £5,100 into a cash ISA before the tax year ends on April the 5th, or £10,200 if you make use of stocks and shares ISAs too.
After that, the annual allowance rises with inflation to £5,340 for cash ISAs or a maximum of £10,680 if you also invest in stocks and shares.
How can I find the right ISA?
JH: You should shop around carefully and make sure you find an ISA that meets your needs. So whether that is one that gives you instant access to your money, whether that is one where you lock your money away for a bit of time but get a higher rate as a consequence. You should also be very careful about the amount that you invest with any one institution at the moment, so keep that below the level of the Financial Services Compensation Scheme limit of £85,000.
FH: If you do have more than £85,000 saved across ISAs and other accounts, make sure you split it between banking licenses.
Some different brands are owned by the same bank, for example, Alliance & Leicester is owned by Santander. That means you need to be extra careful to make sure all your money is protected under the compensation scheme.
Since base rate might rise, should I avoid longer fixed rate cash ISAs?
JH: My personal preference would be to have shorter range product, maybe one or two years is still quite short term. The market to an extent has factored in the fact that they’re expecting base rate to rise, so you can still get some pretty good savings rates out there if you’re investing in the short term as well as the longer term.
FH: Choosing a long-term fixed rate account like a five-year cash ISA might seem like a bit of a gamble, as interest rates could start to rise during the term. However, these accounts are paying the best rates just now, so you may decide it’s worth the risk to secure higher tax-free returns on your money.
There’s a wide range of ISAs available and only you can decide which one best suits your needs. Take the time to compare all your options through our site, but do it fast as you only have a few more weeks before you lose your 2010/11 allowance.