The Bank of England interest rate has been below 1% for 12 years. If you’re a saver, you may think there’s little point in shopping around for the best deal or opening an ISA. But there are still valid reasons for making the most of your ISA allowance.
Each tax year, you can deposit up to £20,000 into an ISA. If you don’t use this allowance during the tax year, you lose it. In the past, ISAs offered an effective way to save with interest rates that helped your money grow. However, the low-interest rate environment means that savings have been earning little for more than a decade. But that doesn’t mean you should discount your ISA just yet, here are five reasons to use your allowance.
1. ISAs provide a tax-efficient way to save
Most people benefit from the Personal Savings Allowance, the amount you can earn in interest from your savings before Income Tax is due. Your Personal Savings Allowance depends on your Income Tax band:
- Basic-rate taxpayers: £1,000
- Higher-rate taxpayers: £500
- Additional-rate taxpayers: No allowance
If the interest earned in a tax year exceeds your allowance, or you don’t have an allowance, the interest earned will count as income and increase your tax bill. ISAs are a tax-efficient way to save, so you won’t have to pay any Income Tax on the interest you earn.
2. A fixed-rate ISA could give you access to higher interest rates
If you opened an ISA a couple of decades ago, you may have expected an interest rate of 5%, but now the rates on offer are much lower. However, by shopping around, you can find some accounts that are higher than the average. Often, these ISAs will mean you need to lock your money away for a certain period. If you’re saving for medium- or long-term goals, this type of savings account could suit you.
3. It provides a way to invest tax-efficiently
ISAs aren’t just an efficient way to save. You can use them to invest tax-efficiently too. The money you earn in returns is not subject to Capital Gains Tax. So, if investing is part of your financial plan, it makes sense to use your ISA allowance first.
A Stocks and Shares ISA offers you a way to invest your money, which can help you generate higher returns than a savings account. However, investing does come with some risks and the value of your investments may fall as well as rise. To smooth out the volatility of the investment markets, it’s advisable to invest with a long-term timeframe in mind.
4. A Lifetime ISA could boost your savings
If you’re eligible for a Lifetime ISA (LISA), it could provide a 25% boost to your savings. To open a LISA, you must be between 18 and 40. You can only deposit £4,000 each year into a LISA, but you’ll receive a 25% bonus from the government so it’s worth taking advantage of if you can.
One thing to keep in mind is when you’ll want to access your savings in a LISA. If you make a withdrawal before you turn 60 for a purpose other than buying your first home, you will incur a 25% penalty, effectively you’ll lose the bonus and a portion of your own savings. Money in a LISA can either be held in a cash account or invested.
5. An ISA can make financial sense as part of your estate plan
If you’re married or in a civil partnership, an ISA can make sense as part of your estate plan. When you pass away, a surviving spouse will automatically receive a one-off additional ISA allowance. For instance, if your partner has £100,000 held in ISA when they pass away, you’d be able to deposit this amount in your own ISA, alongside using your usual £20,000 allowance.
This means your partner will be able to inherit your savings or investments and continue to hold them in a tax-efficient way. The additional prescription applies even if the money is intended for someone else. So, even if you want to leave your ISA savings to your children, your spouse will benefit from an increased ISA allowance.
Don’t forget about Junior ISAs
As well as an effective way to save and invest for yourself, a Junior ISA (JISA) offers a way to build a nest egg on behalf of a child. Each tax year, a child can have up to £9,000 deposited on their behalf into a JISA. Like adult ISAs, they offer a tax-efficient way to save and invest. However, keep in mind, the money will be locked away until the child turns 18.
If you’d like to discuss how ISAs can help you reach your goals, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Stocks and shares ISA investments do not afford the same capital security as cash ISA’s. Investments carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.