How much can I put in?
This tax year the tax-free allowance is £15,000. From April 6, the total you can invest in your Isa rises to £15,240.
How old do you have to be?
You must be over 16 to buy a cash Isa, but at least 18 to be eligible for the stocks and shares variety.
What is the typical rate?
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According to the Bank of England, the average rate today is a lamentable 1.02 per cent. In 2007, the rate was 5.5 per cent.
Why have rates gone down?
The historically low base rate set by the Bank of England is one factor; perhaps more significant is the lack of motivation on the part of the banks and building societies to incentivise savers to part with their cash. Since the Funding for Lending Scheme was introduced in 2012 — a government initiative providing lenders with access to cheap money — they haven’t needed to attract savers to raise cash.
What type of accounts are on offer?
Easy-access, notice and fixed-rate. Easy-access accounts, as the name suggests, allow instant access to your money. Notice accounts oblige account holders to give a warning that they want to withdraw money. The notice period can range from 40 to 180 days. Fixed-rate Isas tie in cash for an agreed period of time, typically one to five years.
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What are the best rates?
The best easy-access rate is currently 1.5 per cent, offered by the Post Office on its Issue 1 account (online), which includes a 0.85 per cent bonus for the first 12 months; interest is paid annually each March. The NS&I Direct Isa offers the same rate with a maximum deposit amount of £15,000 (the Post Office account’s limit is £150,000).
Hinckley & Rugby building society has a 120-day-notice cash Isa offering a rate of 1.6 per cent — transfers in from previous Isas are not allowed.
The best one-year fixed-rate Isa is available through United Bank, offering 1.65 per cent (apply by post or in branch). Santander has a two-year fixed-rate Isa paying 2 per cent; the catch is that you have to hold a 123 Santander current account, which comes with a monthly fee of £2, a Santander credit card, or be a “Santander Select” customer.
When is it best to open an Isa?
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Bank of England data from 2011 to 2014 records a spike in rates at the end of March and beginning of April. (The gains are small however — 0.3 percentage points or less.)
What is the alternative to cash?
A stocks and shares Isa, though it may be too risky for your tastes. Sylvia Waycot, editor of the financial website Moneyfacts.co.uk, says: “We are seeing people who may previously have not been comfortable with risk now feeling like they have to take risks to get a decent return — and entering the stocks and shares Isa market. For me the key thing is, if you can sleep at night with the decisions you’ve made then fine. But if it’s going to keep you awake then it’s not the right decision.”
Is an Isa the best place to save?
Not always. Anna Bowes, co-founder of savingschampion.co.uk, says aspiring homebuyers who will need to access their savings in the next year or two would do better putting their money in a Santander 123 current account, with a rate of 3 per cent — even factoring in the tax you pay on the Santander account. For a basic-rate taxpayer, the after-tax rate on the 123 account works out at 2.4 per cent; a higher-rate taxpayer receives 1.8 per cent interest.
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What about Junior Isas?
An extension of the adult Isa system, Junior Isas enable children to receive tax-free interest on savings, as well as tax-efficient returns on stock market investments. They have to be set up by parents but grandparents, or anyone else, can pay in. You can put up to £4,000 into Junior Isas this year, rising to £4,080 on April 6.
From April 6, parents will also be able to transfer money in Child Trust Funds (CTFs) into Junior Isas. CTFs were the Junior Isas predecessor and generally offer poorer rates and choice.
Ms Waycot says: “A child can earn as little as 1.1 per cent from a Nationwide CTF and yet their sibling could get 4 per cent with a Jisa.”
The child becomes legally entitled to the proceeds of the Jisa at the age of 18.
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How safe are savings held in Isas?
Cash Isas are protected by the Financial Services Compensation Scheme, like other savings and deposit accounts. Up to £85,000 is covered per person per financial institution. But take care: the compensation is per banking licence, not for each account or brand. Some savings providers that are owned by the same parent bank have their own licences, while others share that licence.
Halifax, the Bank of Scotland and Birmingham Midshires, for example, are all owned by the same group and have the same banking licence. This means that if you had £85,000 in a Halifax Isa and £85,000 in a Bank of Scotland Isa, only £85,000 would be protected if both banks were liquidated.
What happens to my Isa if I die?
The Isa will go to your husband, wife or civil partner — though not to common-law partners — and it retains its tax-free status. The surviving spouse will be given an additional, one-off allowance that is equal to their partner’s total Isa savings. This will be known as the additional permitted subscription. This enables them to re-shelter assets that were in a spouse’s Isa into an Isa in their name. The surviving spouse will have the option to change to a different type of Isa — cash or stocks and shares — or change providers if they wish.