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If you're trying to get a little nest egg
together - for the kids, or the kids' kids- a cash ISA can be
a great way to save money, as well as netting yourself an extra
20% in interest, thanks to their tax-free nature. They're not
as complicated as the TESSAs and PEPs of old either, so take a
seat, get your best calligraphy pens out, and get ready to make
notes…
A cash
ISA is remarkably simple: Every year, you can deposit
up to a set amount in it; currently this amount stands at either
£3,600 or £5,100, dependant on age (you need to be 50+ to access
the higher amount), but is due to change in the new tax year.
That money will then earn interest like any other savings account,
except a normal savings account would have to pay tax on the interest
earned, whereas a cash ISA does not.
As a result of this, an ISA with a lower interest
rate than a standard saver can often produce the same amount of
interest, for example, a normal saver with an interest rate of
3.5% would yield a similar amount of net interest as a cash ISA
earning 3%. There is one thing you should watch out for, though;
you can only deposit up to £5,100 in one tax year. This means
that if you deposit your full allowance and then withdraw some,
you won't be able to put any extra in to replace it until the
next tax year.
"But what about the uncertain economic condition
of the world at the moment?" I hear you cry. Well, it's somewhat
of an urban legend that you need to keep an ISA for a set amount
of time before you earn the tax free benefits. Many providers
will offer you an ISA that will allow you to transfer it at any
time, while not being in any danger of losing any tax benefit.
Moneysupermarket says "Some ISAs will pay a high rate for
the first 12 months because they include an introductory bonus,
so you should be prepared to move to find the most competitive
cash ISA rates. If you do need to switch accounts, make sure you
transfer the balance rather than withdrawing it - otherwise you
could lose the money's tax-free status. You're allowed to move
money from a cash ISA into a stocks and shares account, but not
the other way around." Your new provider should be able to
offer you a form to transfer the money over as well - do not just
withdraw it as you stand to lose your tax break by doing so.
But don't just let your bank tell you they have
the best rates around - at the moment, some accounts are paying
as low as 0.05% interest, which is very easily beatable, even
in today's shaky financial climate. Cash
ISAs, if done carefully and properly, can make your savings
work that little bit harder, and earn you up to 20% more interest
on a savings account with the same interest rate. |
