With just a few weeks left until the end of the tax year on 5 April, now is the time to make the most of this year’s individual savings account (ISA) allowance.
Currently you can squirrel away up to £10,680 a year into ISAs.
Half of this can be placed in a cash ISA, and half or all in a stocks and shares ISA.
Any interest earned is free of income tax, and there is no capital gains tax to pay on investment profits.
In the new tax year, the overall limit will rise to £11,280, and the cash ISA limit will rise from £5,340 to £5,640.
Crucially, if you don’t use your ISA allowance for this tax year you will lose it, as you can’t carry it over into the new tax year – so the key is to act now.
Competition is hotting up
Over the past few weeks a flurry of new cash ISAs have come onto the market, as banks battle it out to bag the top spot and attract customers.
So savers need to act quickly to cash in on the top-paying ISA rates before they are withdrawn.
David Black, from financial analysis firm, Defaqto says: “With the base rate frozen at 0.5 per cent, and inflation still running high, it is hard for consumers to maintain the spending power of their cash.
“This makes it more important than ever to make use of the increased rates available on these tax-efficient wrappers.”
You need to decide whether to go for a fixed- or variable-rate cash ISA account. Higher rates are currently available if you are willing to lock your money away for a set period.
But only invest funds you know you won’t need for the duration of the term, as early withdrawals are often not permitted, or subject to an interest penalty.
Also, opting for a fix means you risk missing out on higher-paying accounts when rates do eventually rise.
Best buy cash ISAs
Yorkshire Bank is paying 4.4 per cent on its four-year fixed-rate deal. This just pips the top rate on a five-year fix of 4.25 per cent from BM Savings.
Elsewhere, NatWest has a three-year fix at 4.2 per cent and a two-year fix at 3.9 per cent, and Aldermore has a one-year fix at 3.35 per cent.
For variable-rate ISAs, Nationwide is paying 3.1 per cent, and the Cheshire Building Society is offering 3.06 per cent.
As a saver you need to be aware that both these variable deals come with a bonus which drops away after a year, so you need to ready to move your funds at this time.
For accounts without a bonus, M&S Money is paying 3 per cent and Virgin Money is paying 2.85 per cent.
If your cash ISA is paying a poor rate of interest, you should move it to a more competitive account but follow the correct procedure so you don’t lose the tax-free status.
“Review the rate to see if you can get better elsewhere,” says Black. “And fill in the relevant applications at your new provider so that it can arrange the transfer from your existing provider.”
Savers can now benefit from improved rules which means providers must complete transfers in 15 working days. You should also not lose out on any interest during the transfer.
But be aware that not all ISAs allow transfers in, and while you can transfer from a cash ISA to a stocks and shares ISA, it is not possible to transfer the other way around.
Stocks and shares ISAs
Generally speaking, over the longer term, equities have provided a better return than cash.
Before investing in stocks and shares ISAs, also known as investment ISAs, ask yourself whether you want to select the individual shares yourself or use collective funds, and what initial charges are levied.
Funds are less risky than investing directly in individual companies because they typically spread money between about 50 stocks.
Patrick Connolly from adviser AWD Chase de Vere picks out funds such as Cazenove Multi Manager Diversity, AXA Framlington UK Select Opportunities, and JP Morgan Emerging Markets.
Children born after 2 January 2011 last year, or before September 2002, are eligible to take advantage of tax breaks using the Junior ISA (JISA).
These accounts allow under-18s to shelter cash, stocks or investment funds from the taxman.
Under current rules up to £3,600 can be placed in stocks and shares, cash or both, and these can only be cashed in when the child turns 18.
Lloyds TSB, Skipton and Nationwide are all paying 3 per cent on cash JISAs but given the time-frame, better returns may be on offer from a stocks and shares ISA.
For parents looking to invest in a stocks and shares JISA, Connolly picks out Investec Cautious Managed, HSBC FTSE All Share Index, and M&G Global Basics.