ISA countdown
March 26, 2008It’s that time of the year again. No, I’m not talking about Easter and it’s certainly not time for Christmas again - the end of the financial tax year is nearing. And what does that mean? You have precisely until April 5th to open an ISA and make use of last year’s tax-free savings allowance.
While I certainly understand that you might be a little worried about entering the stock market at this point in time, there’s still always the option of opening a simple savings account - no more or less exiting than any of the other accounts you might have knocking around, but with the crucial difference that it will earn you at least 20% more interest over time (even more if you are a higher-rate taxpayer).
For the current tax year (2007/2008) you are allowed to put up to £3,000 into a tax-free savings account and if you’ve walked past any high-street bank branch recently you will have noticed that the competition out there is fierce. Seemingly every bank or building society is now trying to get you to open an account with them, and it’s important that you carefully consider the different options available to you before committing your hard-earned cash.
Comparison sites like moneysupermarket.com should help you with the major undertaking of comparing the different accounts currently available. At the end of the day your best choice mainly depends on your individual circumstances and how happy you are to commit your cash for a longer term. Many accounts will require you not to withdraw any cash for at least 12 months (sometimes longer) in order to secure the best interest rates and it’s crucial that you do not ignore the fine print before you sign the dotted line.
My personal favourite at the moment is Barclay’s “Tax Haven ISA” which currently pays 6.5% AER and allows for instant access and no withdrawal penalties. You can open it from as little as £1 so there’s no excuse for having money in an account that you have to pay tax on while your ISA allowance is just waiting to be used. Bear in mind that you would need to earn at least 8.1% AER on a common savings account in order to achieve the same after-tax return on your money!
One word of caution - the rate is marked as variable so you can expect it to drop as soon as the Bank of England should cut interest rates. There’s no guarantee how the rate will behave in the year ahead but it’s certain to drop by 1% after 12 months as the 6.5% includes an introductory 1% bonus. Further, this offer does not allow you to transfer in your previous year’s ISA allowances from another provider. Hence, in order to secure a market-leading rate like this you must be willing to keep your ISA money in separate accounts.
Personally, I’ll be keeping my previous year’s ISA money in an account that I can trust to consistently pay a good rate which is at least matching the Bank of England base rate. Then I will take advantage of the Barclays offer for as long as it might pay more interest than my “regular” ISA account. As soon as this is no longer true, I can simply instruct my bank to transfer the “new” ISA money and add it to the “old” in order to consolidate my accounts into as few as possible while not sacrificing a decent rate of return. After all, no one is paying you for your loyalty… (at least not yet).
Let me know if you have any questions about ISAs and I will try to help as much as I can! Just please do something with your allowance before April 5th.
