How To Make The Most Of An ISA

ISAIt’s worth considering an ISA as an excellent option for saving your money. An Individual Savings Account will allow you to put aside money tax free, and can be divided between cash and stocks and shares accounts. You can invest £5,760 into a cash ISA during the current 2013-2014 tax year, and up to £11,520 in a stocks and shares ISA, deducting the cost of any cash ISA. Most people tend to put money into a cash ISA, which can represent an instant access or fixed account that can be built up over time, and consolidated with older accounts. How, then, can you make the most of an ISA for your savings?

Main Benefits

The main benefits of using a cash ISA include being able to shield your savings from the taxman, with the money placed into your ISA protected from income tax. You can build up towards the ISA limit during the tax year; withdrawing money will not reduce the amount that you’ve paid in during the year towards the limit. You then receive interest on your account, which should trend above the rate of inflation to provide you with a good return on your savings.

Comparing the Market

It’s important to compare the ISA market at the start of the new tax year to see whether you can switch to a better interest rate. You can transfer the money that you’ve already built up in an ISA from the previous year or years into a new account; you can also keep old accounts and transfer them into new ones, while opening and paying into a new ISA for the tax year – you’re only allowed to pay into one cash ISA and one stocks and shares ISA per tax year, though.

Many banks will provide excellent incentives to transferring or opening up a new ISA, which can include a good interest rate for your first year. Fixed rate ISAs are also a good idea if you can avoid withdrawing from an account during the year – a two or three year fixed rate ISA can produce a higher interest rate and greater savings than an instant access ISA, for example.

Paying In

It can be better to pay into your ISA at the start of the tax year, rather than gradually or at the end of the year; this is due to you being able to aggregate more interest on your account over time – the higher the principal you have saved, the more you can stand to generate in interest during the year. The same logic also applies to stocks and shares ISAs, where you can build up more interest by paying in early to your limit.

Making the Most of Stocks and Shares ISAs

Like cash ISAs, stocks and shares ISAs are tax free, and can involve your money being invested in individual shares, bonds, pooled investments, and trusts – you can potentially gain a higher yield from this type of savings account than a straightforward cash ISA, but with the attendant risk of investments going down and your rate of interest declining. It’s also worth remembering that you can transfer funds from a cash ISA into a stocks and shares ISA, but not vice versa.

Transferring ISAs

To get the most out of your ISA savings, you should keep up to date with interest rates and offers from different banks. You can have as many ISAs as you want from previous tax years, as long as you only pay into one ISA in every tax year. This means, though, that you can choose to transfer your previous years’ funds into a new account to take advantage of a better interest rate, or you can break up a large savings sums into multiple high-interest accounts. Whatever you do, though, don’t withdraw your money to make a transfer, as this will void its tax-free status. Instead, arrange with your bank for an ISA transfer, which should be completed within 15 working days.

Again, you are only allowed to pay into one cash ISA and one stocks and shares ISA per year, with the option of consolidating past ISA accounts to take advantage of better interest rates. To this end, you need to make sure that you can keep track of the different rates on old accounts, and whether the interest that you’re earning is enough to make your account in line with rising inflation and the cost of living.

Getting Advice

Speak to an independent financial advisor about how best to handle your ISAs if you’re considering making a transfer; similarly, check to see what rates are available at the start of every tax year to ensure you’re not missing out on any new deals; you may have to pay in a minimum amount of money to some ISAs, while others will offer different interest rate options if you’re prepared to lock in your savings for several years. It’s also important to remember that when consolidating old ISAs, you are only protected up to £85,000 on your savings with regulated providers.

Victoria Anderson is a full time financial writer and avid saver. She currently contributes to sites like guarantorloansdirect.com and you can find her other work on sites like The Telegraph.

Tim Esterdahl

Tim Esterdahl is the editor of IFCS blog. He is a married father of three and enjoys golf in his spare time.

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