The start of the new tax year is approaching fast, and many people will be looking to ensure they’re getting the most from their savings.
With the Bank of England’s Base Rate currently at 5.25 percent – the highest it has been since April 2008 – savers are enjoying some of the best returns on cash savings in over a decade.
This also means more savers risk exceeding their personal savings allowance and consequently having to pay tax on the interest they earn on their savings. However, Cash ISAs can offer an efficient solution to this problem, a savings expert has said.
Peter Hatton, head of savings at TSB, said: “Using your annual ISA Allowance in this and the next tax year will help protect your returns from the tax man.
“But the current rates may not last – with the financial markets predicting that the Bank of England will begin reducing interest rates later this year. So, choosing the right cash ISA for you means considering the possibility of the first fall in Base Rate since March 2020.”
Instant Access Cash ISA
An instant access Cash ISA is great for people whose priority is flexibility and ready access to their savings.
However, Mr Hatton noted: “This type of account usually has a variable interest rate, so you may get a lower return on your balance if rates fall.”
Fixed Rate Cash ISAs
Those who are prepared to lock their money away may opt for a fixed-rate product. these accounts offer a good solution to protect savings if interest rates drop because the interest rate is guaranteed for the term of the product.
Mr Hatton said: “Many of the fixed-rate ISAs available today offer lower rates than they did a few months ago because banks are already anticipating a lower Base Rate in the future. But it could still be wise to lock in the guaranteed return offered by a fixed-rate product.”
Many banks offer a range of fixed-rate accounts, with different terms and interest rates.
Mr Hatton suggested: “You could take advantage of this by splitting your savings and spreading them across multiple terms – for example over a one-year and a two-year fixed-rate ISA.
“This approach can help during uncertain times, because the returns from the two-year product are protected if interest rates fall in the short-term, and the balance in the other account can be re-fixed after just one year, which is good if interest rates remain stable or even rise in the meantime.
Limited Access Cash ISAs
Some banks offer limited access or defined access ISAs. Mr Hatton said: “These can be ideal when you want a better return than you’d get from a pure instant access account, but with greater flexibility than a fixed-rate product
“For example, TSB offers the Save Well ISA, which offers a headline interest rate of 3.75 tax-free/AER (variable) in the months you don’t make a withdrawal, or 0.49 percent/0.50 percent tax-free /AER (variable) when you do make a withdrawal.”
The smart money app Plum is leading the market with a similar offer. Its easy access ISA boasts an Annual Equivalent Rate (AER) of 5.15 percent with the condition that up to three withdrawals are made. However, the interest rate decreases to three percent if four or more withdrawals are made in one year.
Stocks and Shares ISA
A Stocks and Shares ISA is an ISA used for investment purposes and many financial services providers offer them.
Mr Hatton said: “If you’re over 18, you can choose to use some or all of your £20,000 Annual ISA Allowance to invest in a stocks and shares ISA. The returns from investments can be attractive and of course, the benefit of an ISA is that you don’t pay tax on any gains.
“But this approach is normally only appropriate for individuals who are prepared to put their money away for longer timescales – typically at least five to 10 years. And remember, the value of your investment can go down as well as up.”
He added: “Always make sure you do your research before investing and consider seeking financial advice.”
Lifetime ISAs and Junior ISAs
Another available ISA option is the Lifetime ISA, designed specifically for saving money towards a house or retirement.
Mr Hatton said: “If you’re aged between 18 and 40 and you’re planning to get on the property ladder or for your retirement, this option is worth considering. You can contribute up to £4,000 each year, and the Government will add a 25 percent bonus, of up to £1,000 each year.”
People living in the UK with children under 18 can also open a Junior ISA or Junior Stocks and Shares ISA.
Mr Hatton said: “Like other ISAs, the gains you make are tax-free. The maximum limit for a Junior ISA in the tax year is £9,000.
“It’s a great way to save for your kids’ future but remember you can’t take money out of a Junior ISA until the child turns 18 – so this isn’t a good option if you think you might need access to the funds.
“Whichever you choose, as long as it’s in an ISA, all the interest you earn will remain free of tax.”
