The past decade has been miserable for savers.
Low interest rates, coupled with prolonged periods of relatively high inflation has meant that capital held in savings accounts is guaranteed to lose value.
However, research now shows that there might be a light at the end of the tunnel, especially if you have a Cash ISA (Individual Savings Account).
Boost for Cash ISAs
According to MoneyFacts, both the average interest rate and number of ISA products available has increased consistently during the first two months of 2018.
Both Instant Access and 18+ month fixed-rate ISAs saw an increase in rates between December 2017 and February 2018, resulting in:
- Instant Access rates jumping to 0.78% from 0.68%
- Fixed rate ISAs rising from 1.38% to 1.46%
They might seem like small increases, but they can make a big difference to your savings, especially if you are using your ISA Allowance in full each year.
Looking at the bigger picture, the upward trend in both interest rates and ISA popularity are both positive signs for those who have already put their money into an ISA account.
Should you open a Cash ISA?
Whether you have never had one, or are thinking about reviving an old account, the rate rises should be seen as a catalyst for reviewing your interest rates.
Before deciding whether a Cash ISA is the right vehicle for your savings, it is important to know how it works and what you can do with it. In brief:
- A Cash ISA holds your deposits and interest is added on a tax-free basis
- Cash ISAs are available through banks and building societies
- You must be 16 to open an Adult ISA, but parents and grandparents can open a Junior ISA before this age, and you can hold both a Junior ISA and Cash ISA from 16 to 18
- Each year, you can deposit up to £20,000 into ISAs. If you have a Lifetime or Help to Buy ISA, your allowance will be spread across the two accounts
- Instant Access Cash ISAs allow you to withdraw your savings whenever you want, while some Cash ISAs will require that capital is stored for a set amount of time
Making the most of your Cash ISA
If you’re already paying into a Cash ISA and want to make sure that you are getting the best returns on your deposits, there are three things you can do:
1. Check your rate and shop around
Compare your own rate to those available elsewhere. You can do this either online or in person but be sure to check a range of comparison websites to get a balanced perspective.
Consider the unknown. There are a variety of banks that you have probably never heard of; both challenger banks and Islamic banks are on the rise and may be able to offer you something better than you will find on the high street.
Islamic banks operate without paying or charging interest but offer profit instead. These banks operate in a different way to the firms you are used to but could still be a viable option for your savings.
Before settling on a bank or building society, make sure that they are protected by the financial Services Compensation Scheme (FSCS), this guarantees that your savings (up to £85,000) are not lost, should the provider go under.
2. Move your ISA
You can only open one Cash ISA in a tax year. But if you have noticed that the rates on another bank or building society’s products are better than your current ISA account, don’t be afraid to transfer your existing savings over.
If you choose to do this, you will need to make sure that your new bank or building society accepts transfers and complete an ISA transfer. Remember that you do not need to close your first account or withdraw your savings, as the two providers will carry out the transfer on your behalf.
3. Make use of your allowances
The Annual ISA Allowance is currently £20,000 per year. That means that you can make deposits up to that amount, spread across your ISA accounts, each year.
The Personal Savings Allowance allows you to earn up to £1,000 each year through savings income or interest, without incurring tax. However, this allowance is not affected by ISA accounts, so you are free to use another type of savings account to hold any deposits outside of your ISA allowance in a tax-efficient manner.
Do you need financial advice?
If you find yourself feeling lost and confused when it comes to savings and investments, now is the time to seek independent financial advice.
A financial adviser will be able to give you tailored solutions to help you work toward the future you dream of, whatever that involves.
Ready to start planning your financial future? Get in touch.
The Financial Conduct Authority does not regulate Deposit Account
