Are ISAs still worth it?
Wow it really has been a while since I updated here.
Firstly I'll answer the question that some may ask - what is an ISA?
An ISA (individual savings account) is a way of saving where you pay no tax on the interest earned. There are certain rules to them such as limits on how much you can invest in a tax year.
Now there are two main types - cash and investment ISAs.
As investment ISAs are linked to stocks and shares etc I will not discuss them here as there are too many ins and outs for them.
So cash ISAs
So why may they no longer be worth it?
Well the governement introduced a savings interest allowance 3-4 years ago which says that, depending on your income, you can earn a certain amount of interest tax free - regardless of the account it is in.
the limits are - basic rate tax payer (20%) - £1000 interest tax free
- higher rate tax payer (40%) - £500 interest tax free
- additional rate payer (45%) - no interest tax free.
Any interest you earn on an ISA account is NOT included in this amount
So if these limits don't include ISAs surely they are worth it as well as an extra tax free account?
Here I have to use one answer I tend to dislike - yes and no.
The yes they are:
As ISAs are not included in the tax free savings allowance it means you can earn more than the limit tax free. You can use the tax free interest allowance and the interest in your ISA.
No they are not:
ISAs tend to have lower interest rates than other access savings accounts so the interest you earn in an ISA is less than a general access savings accounts.
If you are a basic rate income tax payer you can earn £1000 interest tax free. Even if we take the bank of England base rate of 0.75% as the rate you will receive you will need just over £133,000 in savings to earn the £1000 in interest.
Naturally if you can lock your money away for a longer period of time (usually 1-3 years) the interest rate will be a bit higher or if you can commit to saving a certain amount each month in a regular saver account these also tend to be a bit higher in interest too.
Conclusion:
If you are a basic rate tax payer and have less than £133,000 in savings then it would be better to find an access savings account which pays better interest rate than ISAs do as this will give you more in the long run.
If you do have this much in savings (lucky you) or are a higher rate tax payer then use your access savings account tax free allowance first then put the rest of your savings into an ISA to make the best use of the interest rates and the tax free allowances.
What about LISAs?
The newest on the market the Lifetime ISA.
There are only two places offering a cash LISA Skipton building society and Nottingham building society. Others are offering investment ones - but I'm leaving them alone on here.
What is the difference to normal ISAs?
Firstly to open a LISA you have to be between 18 and 39 years old.
You can only invest £4000 each tax year
You can only pay into it until you are 50 yeas old
Now comes the biggest limitation of them.
you can only use the money to use towards a deposit on your first home or for your retierment.
For the retiermnent option you can not access the money in the account until you are 60 without penalties (unless diagnosed with a terminal illness with less than 12 months to live)
For the first time buyer option - what makes a first time buyer - if you have NEVER owned a residential property in any way shape or form then you are a first time buyer.
If you owned a home sold it, rented for a while and now want to buy again or you inherited a property or a share in a property or have been on the deeds of a property you are NOT a first time buyer.
So with all these restrictions are they worth it?
Well the big plus is that the government will give you an extra 25% of the capital you put into them each month. So if you put in the maximum £4000 the government will give you an extra £1000. This is in addition to any interest the building society will give you. So if you open one on your 18th birthday and put £4000 in each year then you will have put in £84,000 and the government will give you an extra £21,000.
However, you need to make sure you will not need the money any time soon as there are large penalties for taking the money out for anything other than the two reasons above.
You can also have a cash ISA and a cash LISA in the same tax year.
Firstly I'll answer the question that some may ask - what is an ISA?
An ISA (individual savings account) is a way of saving where you pay no tax on the interest earned. There are certain rules to them such as limits on how much you can invest in a tax year.
Now there are two main types - cash and investment ISAs.
As investment ISAs are linked to stocks and shares etc I will not discuss them here as there are too many ins and outs for them.
So cash ISAs
So why may they no longer be worth it?
Well the governement introduced a savings interest allowance 3-4 years ago which says that, depending on your income, you can earn a certain amount of interest tax free - regardless of the account it is in.
the limits are - basic rate tax payer (20%) - £1000 interest tax free
- higher rate tax payer (40%) - £500 interest tax free
- additional rate payer (45%) - no interest tax free.
Any interest you earn on an ISA account is NOT included in this amount
So if these limits don't include ISAs surely they are worth it as well as an extra tax free account?
Here I have to use one answer I tend to dislike - yes and no.
The yes they are:
As ISAs are not included in the tax free savings allowance it means you can earn more than the limit tax free. You can use the tax free interest allowance and the interest in your ISA.
No they are not:
ISAs tend to have lower interest rates than other access savings accounts so the interest you earn in an ISA is less than a general access savings accounts.
If you are a basic rate income tax payer you can earn £1000 interest tax free. Even if we take the bank of England base rate of 0.75% as the rate you will receive you will need just over £133,000 in savings to earn the £1000 in interest.
Naturally if you can lock your money away for a longer period of time (usually 1-3 years) the interest rate will be a bit higher or if you can commit to saving a certain amount each month in a regular saver account these also tend to be a bit higher in interest too.
Conclusion:
If you are a basic rate tax payer and have less than £133,000 in savings then it would be better to find an access savings account which pays better interest rate than ISAs do as this will give you more in the long run.
If you do have this much in savings (lucky you) or are a higher rate tax payer then use your access savings account tax free allowance first then put the rest of your savings into an ISA to make the best use of the interest rates and the tax free allowances.
What about LISAs?
The newest on the market the Lifetime ISA.
There are only two places offering a cash LISA Skipton building society and Nottingham building society. Others are offering investment ones - but I'm leaving them alone on here.
What is the difference to normal ISAs?
Firstly to open a LISA you have to be between 18 and 39 years old.
You can only invest £4000 each tax year
You can only pay into it until you are 50 yeas old
Now comes the biggest limitation of them.
you can only use the money to use towards a deposit on your first home or for your retierment.
For the retiermnent option you can not access the money in the account until you are 60 without penalties (unless diagnosed with a terminal illness with less than 12 months to live)
For the first time buyer option - what makes a first time buyer - if you have NEVER owned a residential property in any way shape or form then you are a first time buyer.
If you owned a home sold it, rented for a while and now want to buy again or you inherited a property or a share in a property or have been on the deeds of a property you are NOT a first time buyer.
So with all these restrictions are they worth it?
Well the big plus is that the government will give you an extra 25% of the capital you put into them each month. So if you put in the maximum £4000 the government will give you an extra £1000. This is in addition to any interest the building society will give you. So if you open one on your 18th birthday and put £4000 in each year then you will have put in £84,000 and the government will give you an extra £21,000.
However, you need to make sure you will not need the money any time soon as there are large penalties for taking the money out for anything other than the two reasons above.
You can also have a cash ISA and a cash LISA in the same tax year.
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