ISAs (Individual Savings Accounts) were introduced in 1999 to replace PEPs (Personal Equity Plans) and TESSAs (Tax-Exempt Special Savings Accounts). Today Cash ISAs are the most popular form of ISA. Government figures show that £58.8 billion was subscribed to Cash ISAs in the 2015/2016 tax year, across 10.1 million accounts. This represents an average subscription of £5,810, significantly less than the maximum subscription limit of £15,240, indicating that many investors are either not taking full advantage of the ISA allowance or are also investing in Stocks & Shares ISAs. This allowance will rise to £20,000 for the 2017/2018 tax year allowing investors to earn tax-free returns on an even higher level of investment. Here we explain why it’s a good idea to check your existing ISAs to ensure you’re getting the best rate available.
The advantage of opening an ISA is clear: the chance to earn tax-free returns on investments up to the ISA subscription limit. There is also a long-term appeal as any future changes to the market or base interest rates will not remove the tax benefits of money saved in ISAs.
However despite the popularity of Cash ISAs (around 80% of ISA subscriptions are cash rather than stocks & shares), they can often offer extremely low returns, even below the rate of inflation.
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Following the global financial crisis of 2008, the Bank of England base rate fell to 0.5% and this has significantly impacted the rate of return on cash investments. The base interest rate was further reduced to 0.25% in August 2016, with the rates of the top paying Cash ISAs down by a further 30% since September 2016. As reported by the Financial Times, the new higher Personal Savings Allowance of £1,000 for basic rate taxpayers has made Cash ISAs less beneficial for most people, as they would need to pay a huge amount into an ISA to hit the level of earnings that would make them better value than other savings accounts.
With interest rates at historically low levels since 2009, it’s a good idea to check your existing ISAs to keep an eye on what you’re earning. Many people pay money into a Cash ISA and then forget about it, meaning they could be missing out on the best possible rates available. Comparing the different ISAs in the market is important to ensure you’re getting the best returns and making the most of your money. Remember that fixed-term Cash ISAs can offer better rates, although your money will be locked in for a set period of time and there’s likely to be a fee to withdraw funds early.
You can open one Cash ISA, one Stocks & Shares ISA and one Innovative Finance ISA in each tax year. If you can, it’s best to make full use of your ISA allowance for each year as this can’t be rolled over to the next tax year. You can also transfer existing ISAs from previous years to a new ISA provider without affecting your allowance – make sure you do a provider-to-provider transfer, rather than withdrawing the cash and paying it in somewhere else, or you’ll lose the tax-free benefits.
If you’re looking to transfer your existing Cash ISAs, the new Innovative Finance ISA (IFISA) could offer an alternative for investors who are prepared to take the risks associated with peer-to-peer lending. LendingCrowd launched its IFISA on 14th February offering a 6% p.a.* target rate of return. You can find more information about our IFISA here.
Click below to invest in a LendingCrowd IFISA – invest your ISA allowance before 5th April 2017 as you can’t roll it over to the next tax year!
*Capital at risk. This is a target rate net of ongoing management fees and estimated bad debt.