Savings Accounts & ISAs FAQ
What is an ISA?
ISA stands for Individual Savings Account. These accounts are slightly different from normal savings accounts because they allow you to earn interest on the money that you have saved, without having to pay any tax on the earnings. There are two different types of ISA available: cash ISAs and stocks and shares ISAs. Everybody who is eligible for an Individual Savings Account is given an annual investment allowance that can be divided across the two different types of ISA.
The yearly allowance for ISA investment is currently £15,240 - correct for the tax year 2015/2016. It is important to note that the tax year is from April to the April of the next year.
Who is eligible for an ISA?
In order to have an Individual Savings Account you must be a UK resident or somebody who is normally a resident in the UK. In order to take out a cash ISA you must be at least 16 years of age and to have a stocks and shares ISA you must be over the age of 18. It is also possible for parents or guardians to take out Junior ISAs on behalf of their children. These accounts have a lower limit on the level of investment that can be placed in them each year. Junior ISAs are automatically converted to normal ISAs once the child reaches the appropriate age.
What is the policy on withdrawing money from your ISA?
There are a great deal of different individual savings accounts out there, so it is difficult to give one blanket answer to this question. That being said, there are some general rules that apply to most ISAs on the market right now.
There are a lot of individual savings accounts that are referred to as "easy access". These easy access accounts give you the choice of withdrawing your money whenever you'd like and make it simple to transfer your money to another account. These accounts won't enforce any penalties on you if you should choose to take your money out at anytime.
Another form of individual savings account is what is referred to as "fixed rate" individual savings accounts. This type of account will offer a set rate of interest that will not change for a certain amount of time. These accounts have the benefit of allowing you to plan your finances out in advance because you know exactly what you are going to be earning over a given amount of time. However these accounts often charge you extra if you make a request to remove your savings before the agreed upon time has elapsed. This means that you should only opt for one of these accounts if you are certain that you are happy with not being able to access your money for a set period of time.
How can I make sure that I am getting the best out of my ISA allowance?
There a number of things that you should take into consideration when you set up an ISA and also as time progresses with your present one. The obvious place to start when thinking about choosing an account is how much interest you are going to earn on it. This can be as simple as just looking at what rate the account is offering but you should also keep an eye out to make sure that you don't just get sucked in by a good introductory offer. There are many individual savings accounts that will offer really eye-catching, competitive rates to their new customers but many of these rates will soon give way to standard rates later on. As a result of this, it is important that you make sure that the standard rate is also competitive enough to make it worth your while.
One thing that everybody should be focused on doing is trying to invest their full ISA allowance every year. This means that you should aim at depositing the whole £15,240 that you are entitled to. Whilst this may sound difficult, depending on your income, it means that you will receive the maximum return on your allowance. It is also worth remembering that you can deposit the allowance in full again each year, so you will be increasing the amount that you gain as a return. It is also a good idea to deposit as much money as you can, early in the tax year as it will allow you to receive the most interest possible throughout the year.
How safe will my money be in an ISA?
This depends on what type of ISA you decide to take out. If you opt for a stocks and shares ISA, there will be an inherent risk of the investment performing badly and therefore costing you money instead of making you money as intended. However with a cash ISA, this risk does not exist because it merely functions in the same way as a normal savings account and therefore cannot reduce the amount that you invested.
The Financial Services Compensation Scheme covers both forms of ISA - cash and stocks and shares. This means that if your bank or building society were to collapse, your money would be protected for a value of up to £85,000 for cash ISAs and £50,000 for investments, joint accounts are protected for up to £100,000.
What about higher interest savings accounts that are not ISAs?
There will undoubtedly be quite a few savings accounts out there that are not ISAs and yet offer a higher rate of interest on the money saved within them. These accounts can often be very appealing to people as they feel that they offer a better return on investments than ISAs do. However it is important to remember that these accounts are not protected from tax in the same way that ISAs are. This means that any interest rate that you see being advertised on them should be taken in view of this fact, in other words you should work out what level of tax you will be paying and factor this into your interest rate.
This also depends on what rate of tax you have to pay. If you are a lower rate taxpayer and you see an ISA advertised with a rate of 2.5% AER, you should look for an ordinary savings account that is offering a rate of 3% or higher in order to make it worth your while. Similarly, if you are a higher rate taxpayer, you should look for an ordinary savings account that is offering an interest rate of 4% or higher in order to make it worth your while. Needless to say it can often be hard to find savings accounts that are offering these sort of rates so think long and hard before opting for one over an ISA.
If I feel like my ISA isn't offering me competitive rates, can I switch?
It is always fairly easy to be able to transfer your balance from this tax year into a new ISA. However complications can often arise when you try and transfer your balance from previous years. If you are attempting to do this, it is of the utmost importance that you do not simply withdraw the balance of your old ISA and attempt to deposit it all into your new one. The reason for this is that this deposit will then have left the ISA tax wrapper and will be treated as a new investment. This means that it will be counted as part of your yearly allowance as opposed to being part of your ISAs existing balance.
In order to avoid this happening, what you need to do is go through the procedure of arranging an ISA transfer. Doing this will mean that you can move your balance from one ISA to another, without it having to leave the tax wrapper. However it is important to note that there are many ISA accounts that do not permit people to carry out ISA transfers and it is therefore important that you take the time to check first before you attempt to do this.
What can I do to find the best ISA?
One way to make sure that you find the ISA with the most competitive interest rates and the access to your money that suits you, is by shopping around on the market before you commit to one. By comparing the various different individual savings accounts out there, you can quickly get a good idea of what you can expect from the market when you are looking. Money Expert offers a free and impartial price comparison service that allows you to compare a huge range of the different ISAs that are currently available on the market. Doing this will allow you to make an informed decision about where exactly it is that you would like your money to be stored.