Interest may be earned tax-free through an individual savings account (ISA). The best cash ISA rate may be found from money comparison websites, but savers must look carefully at all the terms and conditions. Higher rates may be earned from a long-term fixed rate ISA.
What is an ISA?
Individual savings accounts (ISAs) are savings accounts with financial institutions on which the savings interest or other earnings are exempt from income tax and capital gains tax. In a tax year, it is possible to save up to £5,340 (for 2011/12) in a cash ISA. Investors should note that it is also possible to save money in a stocks and shares ISA, or a combination of cash and stocks and shares ISAs, up to a maximum in a tax year of £10,680 (2011/12).
Finding the best savings rate
The best ISA rates at any particular time may be found by consulting the money comparison websites such as Moneysupermarket.com, Moneysavingexpert.com, Thisismoney.co.uk or Moneyfacts.co.uk. The investor must be aware of the differences between ISA accounts that affect the amount of interest offered. For example, an ISA where the money is locked away for a fixed term (for example two years) may have a higher interest rate than an instant access ISA. Investors should also be aware that the quoted interest rates may sometimes include bonus interest that is only paid for the first six, twelve or eighteen months for which the account is held, so after that period of time the interest rate would go down. Generally, any rate that is not advertised as fixed for a certain period may move up or down at any time, usually in response to bank rate movements. Some cash ISAs may advertise a rate that is guaranteed for a certain length of time. Investors may find that higher internet savings rates may be offered for online ISAs or for regular savings ISAs.
Fixed rate ISAs
The best interest rates are to be found in long term fixed rate ISAs where money must be locked away for a time period such as three or four years without withdrawals. The investor should consider these ISAs carefully. If money is tied up for some years, the investor must consider if interest rates will rise within that term, meaning that opportunities for earning higher rates on the money during the term will be lost. If the base rate is about to rise, the investor may be better advised to invest in instant access or 90-day notice accounts whose interest rates could rise with the base rate, rather than opting for the fixed term account at a fixed rate which could later fall behind the general interest rates.