During the chaos of the pandemic over the last 12 months, one thing seems certain, many people are sitting on considerable savings.
The kind of money that would have been used for holidays, maybe buying a new car, eating out or visiting the pub, is now burning a hole in people’s pockets or purses.
Just a few weeks into the new tax year and with some people – roughly half the population, in fact – sitting on a nest egg, it’s time to think about making the money work with tax-free savings. Blowing the cash or investing is now a key decision, so once again ISAs come on the radar.
Interest rates remain miserly, but cash ISAs are just savings accounts you never pay tax on. And that means the slimmest of gains are even more important.
Everyone in the UK aged 16 or over gets an ISA allowance at the start of each tax year – for 2021/22, which ends on 5 April next year, it’s £20,000.
According to a new survey, as many as 2.6 million young investors planning to open a new or additional ISA this year, and another one in 10 of these 18- to 24-year-olds pouring more money into an existing ISA, this could be the year of green tax-free investing.
Fifty per cent plan to open a stocks and shares ISA with another quarter considering an Innovative Finance ISA that offers crowdfunded investments, ethical bank Triodos has found.
Either way, a massive 94 per cent of ISA holders under the age of 34 say they already have or would switch their money to an ethical provider, with almost three-quarters of over-35s agreeing with them.
Just like normal savings, cash ISAs come in different flavours – there’s easy access (withdraw whenever you want), fixed rate (where you get a guaranteed rate, but are supposed to lock cash in for a set period of time) and a variety of others.
Easy-access cash ISAs let you take out your money when you want, without penalty – so are a good option if you know you’ll be dipping into your savings, or if you’re not sure. But if you’re unlikely to need access in the short term, consider a fixed-rate ISA – many of these pay more and still let you withdraw (for a fee).
Cash sitting in an ISA stays tax-free as long as it’s in there. The aim is to protect more of your money which is why you should use the full ISA allowance if you can.
If you miss a year now, you might regret it five years later. If you have big savings, you can gradually protect more and more of your cash. Those who started saving when ISAs were first introduced in 1999 could now be sitting on a good tax-free lump sum.
Fixed-rate savings are designed to lock money away for a set period and offer rate security in return. Yet by law, cash ISA providers MUST allow you to access your money, whenever you want it. However, some require you to close the account or transfer out to get your cash. And most will levy heavy penalties on withdrawals – up to 365 days’ worth of interest.
For help and advice on personal tax matters, please get in touch with our expert team today.