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Understanding ISAs
Savers with any spare cash should make sure they use up their tax-free allowance in an Individual Savings Account (ISA) before it expires in a few weeks, writes Holly Thomas
ISAs can provide instant access to your money and allow it to grow free of income tax and capital gains tax.
There are two types of ISAs, and the Government only allows us to pay in a certain amount in each tax year, so it's important to use it before you lose it on April 5.
Cash ISAs are as straightforward as standard savings accounts but typically have a better rate of return - in other words, the perfect home for your rainy day fund. The highest paying ISA is from Alliance & Leicester at seven per cent, but you need to have a Premier current account to qualify for the rate. Otherwise, the most competitive cash ISA deal comes from Government-backed provider, National Savings & Investments, paying 5.8 per cent, on a minimum balance of £1,000.
Be careful not to be seduced by attractive rates that have restrictions in the small print. Yorkshire Building Society pays 5.75 per cent on its cash ISA, but this drops to 5.3 per cent after a 12-month bonus period. This account also requires 30 days notice to withdraw your money, so it's not ideal for instant access. Once you have withdrawn money you cannot top up the account or exceed the £3,000 limit each tax year.
Justin Modray of advisory firm Bestinvest, said: "Should you have an ISA running from previous years, check that the account provider is still paying a competitive rate. If not, switch the funds into a better paying ISA."
Remember, some providers do not allow transfers, including NS&I. The top paying ISA to accept transfers, excluding those with bonuses, is from Kent Reliance Building Society at 5.71 per cent. You can find the best rate yourself by checking best buy tables in the national press, or looking online at comparison websites such as www.moneysupermarket.com/isa or www.moneyfacts.co.uk
The Government's annual limit allows you to invest up to a further £4,000 in a stocks and shares ISA, which offers a choice of investments in the stockmarket. While this introduces an element of risk to your money, studies show the stock market beats a cash account over the long term, so the growth potential is far higher.
An independent financial adviser can guide you to cautiously or aggressively managed funds, according to your attitude to risk.
This type of account should be viewed as a medium-to-long-term commitment and remember, the value of investments and any income from them could fall as well as rise, unlike the cash ISA.
Alternatively, you can put the full £7,000 annual allowance into a stocks-and-shares ISA.
Modray said: "If you don't yet have an ISA, all you need to set one up is your National Insurance number and a few personal details. It's really that simple.
"In particular the over-65s enjoying an increased personal tax allowance will be pleased to know that ISAs do not need to be declared."
* Holly Thomas is an award-winning financial journalist who is Deputy Personal Finance Editor at the Daily Express and Sunday Express.
She offers help and practical advice on getting the best deals for your cash and everything from insurance to credit cards that pay you to shop.
She can provide practical advice on mortgages, banking, consumer issues, savings, borrowing, pensions, credit cards and general insurance.
Holly has presented a money and consumer slot on the popular ITV daytime show 'This Morning', offering advice to millions of viewers on consumer problems, debt, household bills and shopping.
She has been successful in helping many consumers regain money where they have been ripped off by retailers, utility companies and banks.
Holly regularly appears as a lively guest on TV and radio programmes, discussing topics including the housing market, savings, borrowing and other consumer issues.
* Holly Thomas' views represent her own opinions and are for general information only. Always seek independent financial advice.
This article was created: 27 February 2007.
This article was last edited: 15 March 2007.
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