Why you should open an ISA this year
The ISA deadline is fast approaching... Here's a quick round-up of the best cash ISAs out there, plus everything you need to know if you've never opened an ISA before.
Imagine you get a call from the taxman. "I'm feeling generous," he says, "you can keep some of your tax this year and blow it on anything you'd like."
"That's kind," you say, "but no thanks. Why don't you just take the cash from me and use it to boost your coffers - I love giving you money."
Sounds unlikely? Well, if you're keeping money in a bog standard savings account and have never used your tax-free cash Individual Savings Account (ISA) allowance, then this is effectively exactly what you are telling the taxman.
Any interest you earn on money held in a cash ISA is completely tax-free, so HM Revenue & Customs can't get their hands on a single penny of it. Even better, it's tax-free for the rest of your life, not just this year.
With interest rates so pitifully low at the moment, you might argue that the tax benefits are hardly going to set your purse's pulse racing, but you'd be wrong.
Savers who have used their full cash ISA allowance in each of the past 10 years are estimated to be around £2,700 better off than basic rate taxpayers who have saved the same amount outside an ISA. This is despite the fact that interest rates have fluctuated widely during the last decade. Meanwhile, a higher-rate taxpayer is likely to be more than £4,800 down!
If that's not a good enough incentive to open a cash ISA for the first time, then I'm not sure what is.
Everyone over the age of 16 is entitled to invest up to £3,600 into a cash ISA this tax year, which ends on April 5. That means if you want to make use of this year's allowance, you'll need to get your skates on.
There are several different kinds of cash ISA to choose from, so make sure you work out which type of account is going to suit you. Here are the various options...
Fixed rate cash Isas
As the name suggests, fixed rate cash ISAs pay a fixed rate of interest for a set period of time.
You must ensure that you can afford to leave your money untouched during the fixed rate term, as there are likely to be penalties - usually the loss of a several months' interest - if you want to make a withdrawal. Remember too that the rate may drop substantially once the fixed rate period finishes, so be prepared to move your money to another provider when this happens.
Current best buy fixed rate ISAs include Halifax's Fixed Rate ISA Saver which pays 3.35% AER for four years. This ISA can be opened with a minimum investment of £500. Four years is a long time, however, so if you want a shorter term fixed rate, Bank of Cyprus is paying 3.2% AER on its Cash ISA Bond, which can be opened with £1. This rate is fixed until April 5, 2010.
Watch out for accounts which mention the words 'up to' before the advertised rate. For example, Lloyds TSB is currently heavily promoting a 12-month fixed rate cash ISA paying 'up to' a competitive 3.2% AER, but if you look a little closer, this rate is only payable to transferred balances of £30,000 or more - so first time investors won't qualify. The minimum investment in this particular ISA is £3,000, but if you did invest this amount, you'd only earn 1.5% AER.
Instant access ISAs
If you don't want to lock up your money for any length of time, then your best bet is to go for an instant access ISA, which allows you to make withdrawals whenever you want. I like Barclays Bank's Golden ISA which pays 3.61% AER on a minimum investment of £1. However, this rate includes a 1% AER bonus for the first 12 months, so if there are more competitive offers available once the bonus disappears, it may be worth switching at this point. And watch out for service problems - Barclays has failed ISA customers in the past.
Other competitive instant access ISA accounts include NatWest's Cash ISA Plus which pays 3.51% AER on a minimum deposit of £1, and Marks & Spencer Money's Advantage Cash ISA which pays 3.1% AER on balances of £100 and above. The Marks & Spencer ISA again includes a 1% AER bonus, until April 2010.
Regular savings cash ISAs
If you don't have £3,600 to invest straightaway, you might want to consider regular savings ISA instead. With this sort of ISA, you agree to pay in a certain amount each month, usually for a year, in order to get a higher rate.
For example, First Direct's Regular Saver ISA pays a whopping 7% AER fixed for twelve months provided you save between £25 and £300 a month. If you miss a payment or take any money out, the account becomes First Direct's e-ISA, which only pays 0.5% AER.
But bear in mind that to qualify for the account you have to have a First Direct 1st account, which you need to pay £1,500 into every month or you will be charged a £10 monthly fee. Still, as First Direct is currently offering £100 cashback to new customers who open this account, this package is a good option for anyone who earns £1,500 a month (after tax).
What you need to open a cash ISA
If you are opening a cash ISA for the first time, then there are various documents which you will need to provide the ISA provider with:
- To confirm who you are, you will need to show either a full UK passport, or a UK driving licence.
- To confirm where you live, you will need show a bank or credit card statement or a water, gas, electricity, cable TV or landline telephone bill. These must be no more than three months old and mobile phone bills are not acceptable. Current council tax bills or your latest household or motor insurance certificate are also allowed. All documents must be original and not photocopies. And you cannot show a driving licence as proof of address and proof of identity - you need two different documents.
So don't delay, get the cash ISA ball rolling right now! It'll only be a matter of time before you wonder why you didn't start the tax-free savings habit earlier...