‘If you’ve got any savings… you should have an ISA’
This is the statement made in the ISA guide across at Money Saving Expert, although I’m not sure I totally agree with it.
In theory it makes a lot of sense. As part of our series on Savings we’ve looked in general at the reasons behind saving and three top techniques for doing this. Now let’s look at the benefits of having an Individual Savings Account, in particular cash ISAs.
The main advantage of having a cash ISA
The most significant advantage of ISAs is that they are tax-free. Normally as a basic rate taxpayer you’ll lose 20% of your savings interest to the taxman. For every £100 you’ve put away, you lose £20. On a higher rate, this figure is 40%.
This is ridiculous – especially when you consider how very few savings accounts don’t pay more than 1.50% interest per year (pre-tax of course!). You earn little, but lose a lot.
By having a cash ISA, all interest earned on savings is interest kept in savings.
How this works is expressed in some great cake symbolism over on the Money Saving Expert page given at the top of this article – check it out!
Do remember, though, that there is a limit on how much you can save each year. As of now (January 2016), your allowance is just over £15,000. On a junior account it’s around £4,000.
In addition to this fact is also that any of this annual allowance you don’t use will be lost forever. Unused allowance isn’t carried over. If you’ve only used £10,000 of your 2015-16 allowance, you won’t then get £20,000 or so in your 2016-17 allowance. So use it or lose it people.
East Access ISAs do exist
If you’re worried about locking your money away, easy access ISAs are available. If you think you might need to withdraw cash for emergencies or an impromptu holiday, fear not!
But do take care – anything you put into your annual ISA allowance takes away from your annual allowance, even if the money is later withdrawn. If you pay in £14,000 but then remove £1,000, the total amount of allowance used up is still £14,000 – even though only £13,000 now exists in the account.
This might not be a problem for you, but if you’ll manage to save another £2,000 or more before the end of the tax year, you can’t put it all into your ISA. You simply won’t have the allowance left…
ISAs might be a bit too troublesome for you. If you’re wanting easy access, as outlined above, withdrawals will affect your annual allowance.
If you’re not bothered about easy access, then you enter the realms of locking your money away in return for higher interest rates, but you need to be certain you won’t need it, otherwise you risk penalties for accessing it (no bank can stop you withdrawing your own money).
For simplicity and more short-term solutions, you can keep a relatively regular check on your money and basically exploit easy access savings accounts, many of which are accessible online. Some are even online-only offers, like my Tesco Internet Saver.
On the flip side to this, ISA interest rates are long-term, whereas other savings accounts are often finite.
The same goes for current accounts. Some offer far greater interest rates than ISAs, with earnings even higher after tax than what an ISA would give you tax-free! However, these top accounts generally expect to be used as your main account. So they may require you to set up two or more monthly direct debits, and you might not want to.
Why I disagree with Money Saving Expert’s statement on ISAs
In short – I think ISAs are great once you have a larger sum of money, and once you’re more financially secure. They keep your savings safe and whole from the reaches of the taxman.
Furthermore, if you can take out a fixed term cash ISA of two, five or even more years, you reap even greater rewards in relation to other saving accounts.
Nonetheless, if you’re just starting out saving I believe you’re better using an easy access saver with online facilities so you can check it on a regular basis and add and deduct £££s when needed.
Oh, and if you’re under 16 and eager to start saving something, you can’t own an ISA anyway. 16+ only I’m afraid…
But do read up online, definitely check out the MSE ISA guide here, and make up your own mind. And let me know what your thoughts are on this matter!
One last little thing…
If you, like me, are looking into moving home soon, perhaps purchasing your first property, take a look at the British government’s Help to Buy ISA. For every £200 you save, the government will give £50, up to a maximum bonus of £3,000.