It’s ISA time in the UK and it would seem that every financial services provider is going all-out to make sure that everyone is taking advantage of their ISA before the new financial year begins next week. But is it really worth all the fuss?
In short, an ISA is an ‘Individual Savings Account’ in the UK that allows you to save for anything, tax free. The best way that I’ve heard an ISA described is as an umbrella that stops your savings from being rained on by tax. And within your ISA umbrella you can cover both cash and Stocks and Shares from being rained on.
For the 2009/10 tax year ending this week there is a total savings limit of £7,200, up to £3,600 of which can be in cash and the rest, up to £7,200 total (including cash), can be in stocks and shares. For American readers ISAs work very similar to Roth IRAs (tax-free post-tax savings) but us Brits are not limited to saving only for retirement –we can use it for anything!
With such a great opportunity to shield your savings from tax it’s understandably a very popular way to save and one that Magical Penny will be exploring fully in the coming days. But not today.
Last Minute Saving
Yesterday I had an amazing opportunity of working with one of the UK’s leading financial service providers (a rare treat for a personal finance blogger!) and I heard first-hand the number of people rushing to take advantage of the 0910 ISA allowance before the new tax year begins next week. The time-sensitive nature of the calls coming in really hit home to me the fact that so many people rarely consider financial decisions until the last minute: when the deadline is beating down on them:
- Many leave depositing savings into an ISA until the last few weeks of the financial year.
- Many leave saving for a house deposit until they begin thinking about buying a house that very year.
- Many leave retirement planning until they are in their 40s and 50s, having previously thought they had plenty of time.
Don’t get me wrong: I understand the thrill of doing things at the last minute. I’m even writing this post in the early hours! But when it comes to growing your pennies: ‘last minute’ is definitely not the way to go. Make a promise to yourself to do something today to grow your pennies and remember slow and steady wins the race: Save something every month, regardless of what’s going on. When you’re just starting you don’t need to worry about ISA deadlines and interest rates on your savings. Just start.
Making sure as much of your savings are shielded from being rained on by tax is a worthy goal but it is much more important that you are saving as much as you can in the first place so you are not left scrambling around trying to find as much money as possible when deadlines start coming up.
Avoid the fuss and simply save what you can in any account. There’s plenty of time to find the right accounts once you are in the savings habit. If you’re not quite ready then set your savings goals in motion and bring on the new tax year!
Magical Penny does recommend you use your ISA allowance but recommends gradually filling it throughout the year rather than being in a rush to ‘use it or lose it’ -it gives you a chance to find the best rates and makes the process of saving less stressful and more easily automatic.
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{ 7 comments… read them below or add one }
Great article, however your last italic’d statement.
You suggest gradually filling it up throughout the year is best. Surely this isn’t the ‘best’ case. If you have several savings accounts and are in a lucky enough situation to have lots of money moving and using all your ISA allowance on day one of the new tax year would be best. Pure maths: Interest is calculated each day and paid annually, not calculated on the annual end result so putting the full allowance in as early as possible is surely the ‘best’ option.
Sensible advice, as ever. This is the first time I’ve seen someone advise against “panic saving” which may be counter-productive if not thought through.
RightlyKnightly would be correct if ISAs provided the best interest rates but unfortunately, some banks and building societies seem to be taking advantage of the tax-free status of ISAs by offering lower rates of interest than their standard savings accounts, hoping that no-one will notice the difference since the figure that’s quoted is gross. Also, beware of the attractive rate which plummets to a measly one after a year. This has been revealed by a rather worrying investigation by Consumer Focus, discussed in an article from The Times –
http://www.timesonline.co.uk/tol/money/savings/article7082138.ece – well worth a read.
If you you are in the happy position of being able to put some money away for a while, knowing that you won’t need it, consider a fixed rate bond which ties your money up but invariably offers far superior returns.
At the end of the day though, always remember that banks are amoral businesses who will do anything to get hold of your money. As seen in special introductory rates used to entice new customers, they don’t reward loyalty but rely on consumer inertia. What does this mean to the man on the street? Don’t be loyal to them and don’t trust their marketing ploys.
@Rightly Knightly: You’re right: if you have money sitting in a savings account currently, a good option is to put it into your ISA in a lump sum at the start of the tax year -I even did this going into the current tax year last April. However, to take your argument to the most logical conclusion in terms of ‘pure maths’ you would agree that the ‘best’ option would be to put money into an ISA as soon as possible, regardless of when the tax year starts or finishes.
@Rob: some very valid points Rob. ISA interest rates are sometimes lower than other accounts and Magical Penny will be exploring many of the issues raised in your comment in later posts.
The good thing about taking advantage of ISAs now, even if the rates are not optimum, is you at least take advantage of moving money ‘under the umbrella’ now. Once the money is under the umbrella you can transfer to different accounts and rate-chase if you wish. Over the long term, getting that money into a tax-free account can have a bigger effect than the interest itself as you earn interest not only on the money that you put in, but on the extra money that you would have lost through tax. You’re right though –it’s not a black and white issue, especially when there’s ‘regular saver’ accounts and fixed rate bonds that offer interest rates far and above the best ISAs. But if this stuff was any easier I’d run out of things to write about and this finance lark wouldn’t be any fun!
Agree with your point pips, obviously if you have x thousands now you would put it into an ISA before you lost that allowance… forever.
From my time working in a saving dept I remember regular savers were often much worse than ISA’s, even with their headline grabbing rates…
Did you just use a rebel assault 2 quote? (except adding in finance lark). slyly done.
Great post. I like how you always give the US equivalent so you can have dual readership!
@Andy: Some regular savers are amazing (I took advantage of the 10% interest rate that Halifax offered in Summer 08 (I took full advantage and by the end of it (in the final month) I had £6000 earning the equivalent of a 10% annual return. Amazing. That said, even with low ISA interest rates you essentially get tax-free no risk growth for life (if you don’t take it out) so interest rates aren’t as important as some people make out, especially as you shouldn’t really be in cash for the interest rate.
@Sam: You caught me. Guilty! -you know I’ve always loved that quote (for those unaware I’ve found the original quote on Youtube (2 mins 55 seconds into the video):
Ah…memories.
@Kate: Thanks for the encouragement and comment as always Kate! I’m adding the US equivilants in because the personal finance blogosphere is so US-centric -I’m sure I actually know more about US financial products than British ones!
I hope you’ll stick with the blog as I go through ISA season as I hope to contribute something to a British audience that doesn’t have the wealth of information available online that US readers do 🙂
BTW I hope you’re filling your ROTH! 🙂
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