ISAs – why you need one and why you should start saving now

by Jo Robinson on Feb 27,2012

Before I started out as a finance journalist I didn’t know a thing about ISAs. In fact they seemed like a bit of enigma and I assumed they must be far too complicated for me to ever have one. The worrying thing is, I think plenty of other people feel the same.

But you absolutely do need one. And what’s more they don’t have to be complicated at all.

Don’t think of an ISA as an account in itself. Instead think of a normal savings account, then picture the ISA as a ‘wrapper’ around that account which protects your savings from tax. That’s all it is, but it could mean the difference between you losing hundreds of pounds in tax or keeping it all.

The cash ISA allowance is higher than ever at the moment as the government look to encourage us to save. That’s great news as it means you can put more money away from the tax man – £5,340 this tax year, and from 6 April (when the new tax year starts) it’ll increase to £5,640.

So why do you need one?

I always say to people that after their emergency fund – that stash of savings you should have in case you get made redundant or face any other financial difficulty – an ISA is the next most important stash of savings you should have. That’s because it’s just like saving money in any other account, except that you don’t pay a penny of tax on your interest. So when you think of it like that, it would be crazy not to take advantage.

Why should you start saving now?

1. Once it’s gone it’s gone

The ISA allowance doesn’t roll over – once the tax year is over it effectively starts again. So, if you don’t put any money away before 5 April, you’ll have lost your allowance for this year. Even if you can’t make the full amount, any money you do get in an ISA before the cut-off can stay tax-free forever if you want it to. So over time, you can gradually build up more and more savings that are tax free.

2. The best deals will be around in March

As the ISA deadline draws ever-closer all the banks will fight to get your money – which is great news since it means they’ll up their interest rates, and you’ll get a better deal, which in some cases you’ll be able to lock in for the whole year, or even longer if you want.

3. You can get a good savings stash together

You don’t have that much time left but the sooner you start saving, the more you’ll have for your ISA. And the more you have the more interest you’ll earn, tax-free. The more money you can get in there the better remember, because once it’s there it can stay tax free forever. Even if you just start squirrelling away a little every week, it’s better than nothing.

Share and Enjoy:

TotallyMoney Blog Carnival #56

5 romantic ways to pop the question (on a budget)

Jo Robinson

Contributor

Jo is the consumers’ connoisseur. Editor at Money Magpie and writer at Wallet Pop, Jo knows her bank accounts, bargains and budgets. She’s also a dab hand at cooking on the cheap too. Jo’s not only focused on money matters; she also covers sport for The Sunday Times.

Read more posts by Jo Robinson >>>

Subscribe to TotallyMoney/News' RSS feed

Follow TotallyMoney on Twitter

http://www.sterlingeffort.com/ Ash @ Sterling Effort

This might have been great advice in 2007 but right now the differences between what a standard rate tax payer will make in the market leading cash ISA vs the leading instant access savings account is minimal. We’re talking 3% vs 2.5% when inflation has been kicking around 4-5% So if you take out a cash ISA right now as opposed to a normal savings account, your reward will be that you’re losing slightly less money in real terms.
Banks will always stack the rates so you’re never that much better off in a cash ISA anyway. They carefully set the rates so ISAs only slightly outperform normal savings accounts. The real benefit of the ISA wrapper is when you’re willing to take on some risk by investing in non-cash assets. Within stock ISAs, you’re protected from Capital Gains Tax and Dividend Tax. But again, the financial institutions will stack things in their favour by making you pay much higher fees for using this type of product.
Jo Robinson

Ash, I agree that the returns on stocks and shares ISAs are better than those on cash ISAs. The problem is, as you say, that you do take on a level of risk with them – something which I don’t think many consumers are willing to do given the current economic climate.

I’d also say that to reap the real rewards of stocks and shares ISAs you need to have your money tied up for a much longer period of time than in a cash ISA – which can also be problematic for some.

It’s true that there isn’t much difference between the interest rates on cash ISAs and normal savings accounts, but every bit extra you can earn is not to be sniffed at in my view – and if you’re going to save somewhere, you might as well save in a tax-free account. In your example that’s 3% interest you don’t pay tax on versus 2.5% that you do – I know which I’d choose.
http://www.niterainbow.com/ Financial Independence

Well, is there really a point without comparing it with the other bank accounts?

- ISA Savings. Interest received will be lower than inflation.
- ISA Stock Market. What a coincidence! S&P 500 ended the year of 2011 within 0.01% of where it was at the beginning of the year.

…Hmm? Do I miss something here? Either way you stand to loose money.