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Money Advice: Happy New Financial Year
By: Martin Lewis
Money-Saving Expert Martin Lewis
Once inside the cling film, the cake hasn’t changed. The chocolate is still chocolate (cash is still cash) and the strawberry is still strawberry (shares are still shares). The only difference is that, once inside the ISA, the tax man can’t bite it.
No, that year is closed. If you don’t use your allocation within the year, you lose it. If you try to do so, it’ll simply count as opening up this year’s allowance with your old provider.
Yet beware: don’t just take your money out to transfer, as then it’s no longer an ISA. Open the new ISA first and ask it to transfer the money across for you. A few ISA providers charge a penalty if you transfer out; do check, as it can diminish the gain.
Q. Are cash ISAs safe?
You get the same £50,000 per person per financial institution savings protection as any other savings, provided it is in a UK regulated account (all those listed here are).
The fact that it’s in an ISA and you have more than that will not give you extra protection, but provided your combined savings in an institution are under £50k, you will be protected
Yet always check it is definitely UK regulated. For example, shockingly, Post Office savings ISN’T. It’s provided by the Bank of Ireland, so your protection is from the Irish, not UK, state.
Q. I’ve already got a Santander ISA with a terrible rate, why do you say it’s a best-buy?
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Money-Saving Expert Martin Lewis
Money-Saving Expert Martin Lewis takes a look at ISAs
Happy New Year! The new financial year that is – it started this month.
The main cause for celebrating is that everyone over 16 years old can now save £5,100 in a new tax-free cash ISA.
While ISA rates have had a justifiably bad press recently, know what you’re doing and they still vastly out-pay the best savings accounts. And my aim is to ensure you know what you’re doing.
The Basics – what are Individual Savings Accounts (ISAs)?
While ISA rates have had a justifiably bad press recently, know what you’re doing and they still vastly out-pay the best savings accounts. And my aim is to ensure you know what you’re doing.
The Basics – what are Individual Savings Accounts (ISAs)?
For a decade now, whether it’s on telly, radio, in books or on my website I’ve used the same analogy to explain ISAs. It works, so forgive me if I bring out ‘the cakes’ again.
Just imagine you have got a couple of cakes: one chocolate (representing cash) and the other strawberry (shares). Now picture the tax man picking up a slice and takes a bite from it.
Yet each year, to encourage saving, you’re given a tax-free ISA wrapper, a bit like cling film, that you can put around some of the cake.
Just imagine you have got a couple of cakes: one chocolate (representing cash) and the other strawberry (shares). Now picture the tax man picking up a slice and takes a bite from it.
Yet each year, to encourage saving, you’re given a tax-free ISA wrapper, a bit like cling film, that you can put around some of the cake.
Once inside the cling film, the cake hasn’t changed. The chocolate is still chocolate (cash is still cash) and the strawberry is still strawberry (shares are still shares). The only difference is that, once inside the ISA, the tax man can’t bite it.
How do cash ISAs work?
The cash element of ISAs is simply a tax-free savings account, and you can take your money out
whenever you want. This year, for the first time, everyone will be allowed to put £5,100 in one – and, importantly, once the money’s in, it stays tax-free YEAR-AFTER-YEAR.
That has a real impact. Normally, basic rate taxpayers hand over 20% of their savings interest to the tax man (higher rate taxpayers 40%), so keeping cash in an ISA boosts your take-home interest by a quarter (two thirds for higher rate taxpayers) and this gain compounds each year.
That has a real impact. Normally, basic rate taxpayers hand over 20% of their savings interest to the tax man (higher rate taxpayers 40%), so keeping cash in an ISA boosts your take-home interest by a quarter (two thirds for higher rate taxpayers) and this gain compounds each year.
The problem is many providers gleefully take this gain for themselves, by offering desultory low rates like 0.1 percent. Yet you can avoid that:
The Top Paying Cash ISAs
· Top Easy Access Deal – 3.2% with rate guarantee.
The current easy-access best buys are sister banks Alliance & Leicester and Santander, whose Flexible Cash ISAs pays 3.2% AER and guarantees to be 2.7% points above base rate for the first year. So if interest rates rise, so will what you’re paid.
The sting in the tail is that after a year the rate plummets, possibly to just 0.5%. So get one, but put the anniversary in your diary, and then simply transfer it to a better paying deal then.
Next top is Barclay’s Golden ISA, which pays 3.1% AER, though 1% point of which is a bonus lasting 12 months.
The current easy-access best buys are sister banks Alliance & Leicester and Santander, whose Flexible Cash ISAs pays 3.2% AER and guarantees to be 2.7% points above base rate for the first year. So if interest rates rise, so will what you’re paid.
The sting in the tail is that after a year the rate plummets, possibly to just 0.5%. So get one, but put the anniversary in your diary, and then simply transfer it to a better paying deal then.
Next top is Barclay’s Golden ISA, which pays 3.1% AER, though 1% point of which is a bonus lasting 12 months.
· Top Fixed Rate Cash ISAs – up to 3.75%
If you’re prepared to effectively lock your cash away, you can earn more with a fixed rate cash ISA, the Halifax offers a two year fix at 3.5% AER or three years at 3.75% AER.
Once your money is in one of these fixed rate ISAs, there are big penalties for taking it out. If interest rates were to rise so your fixed rate no longer looked competitive, it’d cost you to move to a better rate elsewhere.
If you’re prepared to effectively lock your cash away, you can earn more with a fixed rate cash ISA, the Halifax offers a two year fix at 3.5% AER or three years at 3.75% AER.
Once your money is in one of these fixed rate ISAs, there are big penalties for taking it out. If interest rates were to rise so your fixed rate no longer looked competitive, it’d cost you to move to a better rate elsewhere.
More options at www.moneysavingexpert.com/cashISAs
Cash ISA Q&A
While ISAs should be simple, there are many confusions out there, so here’s a quick Q&A to deal with the most common.
Q. If I take cash out do I lose the tax benefit?
You can take money out whenever you want without any tax impact. Of course, once outside an ISA, the cash isn’t tax-free anymore, but you don’t have to give back the tax gain you made while it was in there.
The key rule though is once the money has been withdrawn, it can’t be returned. An example will help. Say you put in £3,500, leaving you able to put in a further £1,600. Then in a couple of months' time you withdraw £2,000. That has absolutely no effect on how much money you can put into the account. You can still only put £1,600 back in.
The key rule though is once the money has been withdrawn, it can’t be returned. An example will help. Say you put in £3,500, leaving you able to put in a further £1,600. Then in a couple of months' time you withdraw £2,000. That has absolutely no effect on how much money you can put into the account. You can still only put £1,600 back in.
Q. How many cash ISAs can I have?
As many as you want, but only one for the current tax year’s cash ISA. You get a new ISA allowance each tax year, so even if you have opened an ISA before, unless you did it this week, you’ve still got your full 2010/2011 allowance to use.
That means you can open a brand new ISA, and it doesn’t have to be with the same provider as you used previously.
That means you can open a brand new ISA, and it doesn’t have to be with the same provider as you used previously.
Q. Can I still put money in last year’s ISA?
No, that year is closed. If you don’t use your allocation within the year, you lose it. If you try to do so, it’ll simply count as opening up this year’s allowance with your old provider.
Q. What if my old ISAs are earning diddly squat?
Transfer them. The best paying cash ISAs that accept transfers are at 2.75% AER, so if you’ve big money saved, it could be a massive boost. See www.moneysavingexpert.com/isatransfers for all the best deals.
Transfer them. The best paying cash ISAs that accept transfers are at 2.75% AER, so if you’ve big money saved, it could be a massive boost. See www.moneysavingexpert.com/isatransfers for all the best deals.
Yet beware: don’t just take your money out to transfer, as then it’s no longer an ISA. Open the new ISA first and ask it to transfer the money across for you. A few ISA providers charge a penalty if you transfer out; do check, as it can diminish the gain.
Q. Are cash ISAs safe?
You get the same £50,000 per person per financial institution savings protection as any other savings, provided it is in a UK regulated account (all those listed here are).
The fact that it’s in an ISA and you have more than that will not give you extra protection, but provided your combined savings in an institution are under £50k, you will be protected
Yet always check it is definitely UK regulated. For example, shockingly, Post Office savings ISN’T. It’s provided by the Bank of Ireland, so your protection is from the Irish, not UK, state.
Q. I’ve already got a Santander ISA with a terrible rate, why do you say it’s a best-buy?
Like many banks, Santander has a large array of cash ISAs. The best-buy is specifically its Flexible Cash ISA but that doesn’t mean you are getting a decent rate with its other products (transfer out if not). It’s about the specific product, not the provider.
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TV money guru Martin Lewis runs the consumer revenge website MoneySavingExpert.com ; ensure you get his weekly e-mail so you’re constantly saving money.
