If you are considering opening an ISA, it is important that you think about whether or not they are the best option for you, and whether they are still a good place for your money.
There are a number of differences between ISAs and traditional savings accounts, the main one being the tax wrapper. While all savings interest on ISAs is tax-free forever, this is not the case with traditional savings accounts.
However, the introduction of the personal savings allowance in 2016 meant that ISAs were no longer the only way to save while earning interest tax free. The personal savings allowance enables savers using traditional savings accounts to earn a certain amount of interest tax free, depending on their tax rate.
For basic-rate (20%) taxpayers, savings interest up to £1,000 is tax free, and higher-rate (40%) taxpayers can save up to £500 before paying tax. Additional-rate taxpayers are not eligible for the personal savings allowance, meaning the only way they can save without paying tax on interest, is to hold an ISA.
Other differences between ISAs and traditional savings accounts include;
- Traditional savings accounts allow you to pay in anything up to the individual account limit (dictated by providers), while you can only invest a maximum of £20,000 in ISAs during the 2020/21 tax year.
- ISAs allow you to invest in cash, stocks and shares and P2P lending, whereas traditional savings accounts deal only with cash.
- Traditional savings accounts tend to offer higher interest rates for most terms, however the amount saved on tax from using an ISA could outweigh interest made.
- Lifetime ISAs and Help to Buy ISAs benefit from a government bonus, which traditional savings accounts do not.
Although there are now more ways to save tax free, ISAs still offer great benefits - and depending on your circumstances, may still be the best way for you to make the most of your savings.
For example, if you’re saving for your retirement, or to purchase your first home, then a Lifetime ISA may be the best option for you, as this ISA benefits from a 25% government bonus, giving your savings a significant boost.
Additional-rate taxpayers (who are not eligible for the personal savings allowance) and those with a large amount of savings (whose savings interest is likely to exceed the £1,000 tax free allowance) would also benefit more from the likes of a Cash ISA.
If you’re only planning on saving cash, then a traditional savings account (or a Cash ISA) would work fine. However, if you’re interested in taking more risks for the potential of higher returns, you may choose to invest with an IFISA and/or a Stocks and Shares ISA.
As you can see, there are a lot of things to consider, and both traditional savings accounts and ISAs have their benefits. The most important thing is to figure out what is going to be best for you and your circumstances.
CARLTON Bonds are an IFISA provider specialising in fixed term property bonds.
Against a backdrop of low interest rates and a volatile stock market, the IFISA can provide an attractive investment opportunity for experienced investors.
With the ability to hold peer-to-peer loans and debt-based securities, IFISA investments have the potential to generate higher rates of return than more traditional investment routes for investors with a greater appetite for risk.
To find out more about making the most of your annual ISA allowance, download our free guide.