ISA, ISA, baby! Your guide to tax free savings

The ISA deadline is fast approaching and with only a few months to go until the 5th April, itís time to start thinking about tax-free savings and which is the best ISA option for you over the next financial year.

Some of last yearís ISA heroes who offered the best deals have shrunk from offering 3.15% interest rates to as little as 0.5% in some cases. Leading high street banks and lenders such as Halifax, Santander and Barclays were all forced to adjust their ISA rates for the 2011/2012 financial year.

Itís time to ditch the dud ISA accounts which are holding you back and opt for some sexy, high interest rates which could deliver some tangible returns.

Saving is particularly difficult at the moment with the Bank of England stubbornly keeping the base rate at an all time low of 0.5%. This doesnít really give savers much room for their money to grow.

What savers can do, however, is make the best out of the situation and let the banks claw at consumers offering competitive deals in the run up to the ISA deadline in April.

Whilst there are still a fair few weeks to go, banks have already begun the annual scramble to take your money and put it in a savings pot.

Marks & Spencerís Money, for example, will today (9TH Feb) unveil their brand spanking new cash ISA at 3% tax-free savings from just £1. Itís a fairly basic account with no bonus, but it does give you easy access.

What to look for in an ISA?

A Cash ISA is a basic ISA account which allows you to keep a pot of money stashed away which enjoys tax free saving benefits. You can only hold one Cash ISA account per tax year though.

There are a number of different ISA accounts available though. Some, for example, will offer easy access which allows you to dip in and out of your savings pot, while others will also let you do this but will charge you. Some will not let you touch your cash for a year or the duration of the ISA.

Stocks and Shares are a more risky type of ISA, relying on interest rates to bring in the goods. However, with interest rates being so low, this means you may get a very low return. If rates were to pick up above and beyond what cash ISAs can offer though, then it could be a worthwhile investment.

The type of ISA which suits you best will depend on your situation and how much you wish to put away. Some experts argue that ISAs can be an attractive alternative to saving for a pension.

What is the saving limit?

The way that it works is that you can either put half into a Cash ISA and the other half into a Stocks and Shares ISA or, if youíre feeling adventurous, you can put the whole lot into a Stocks and Shares ISA.

This year (2011/12) the ISA limit is £10,680 in total, allowing Brits to put a maximum of £5,340 into a Cash ISA.

From the next financial year, 2012/13, the ISA limit will increase to £11,208, according to the HM Treasury.

That figure runs across both Stocks and Shares ISAs, half of this (£5,640) can be saved in a Cash ISA.

Chris McElligott, Head of Marketing at discount broker Willis Owen, said; “The increased ISA limit is one of the very few useful outcomes of high inflation. With ISA limits indexed to inflation, investors should grab the opportunity to invest more tax-free while it exists.

ìWhile it’s hard to predict, most forecasts suggest that inflation has now peaked, and will start to drop shortly.”

Junior ISAs

Junior ISAs are tax-free savings accounts for children up to the age of 10 which are designed to replace the governmentís Child Trust Fund.  From April 2013, the Junior ISA will be index-linked. Until then the limit stands at £3,600.

What are my Cash ISA options?

The Halifax 5 year ISA saver has a fixed rate of 4.2% and is a great little account if you want to put your money away for a while and not touch it. Your money pot can grow at a tax-free rate for years.

The Cheshire Building Society, which is part of Nationwide, has jumped to the head of the ISA league tables recently by offering a 3.06% deal on cash ISAs. The deal includes a fixed bonus paid until 30th September 2013. For those who want to get hold of their cash when they need it, this account allows unlimited withdrawals and deposits up to the annual limit.

What kind of investment ISAs are available?

Meteor offer an income deposit plan with an annual yield of 7.5%. The minimum deposit is £10,000 and the duration is for 6 years.

If you donít have £10,000 lying around to invest, the Alliance Stocks and Shares ISA is available to open from just £50.

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