ISAs vs. Savings accounts.

If you are reading this it means that you managed to stash some money aside and build your saving nest. That’s great, you’ve done the hard part.

The main goal now for you is to make some money from the money you managed to save, in the form of interest. So we will look at the best places for you to grow this money.

Think of it as a tree. You planted the seed, now let it grow.

 For a long time, cash ISAs have been people’s favourite since they were paying up to 6-6.5% interest rate and ISA allowance has been growing over the years. But today you are lucky if you can find a cash ISA paying 1%. Not your best bet in terms of returns. But what about other things such as: what will happen tomorrow? What if I need my money earlier?

We have put together the pros and cons of ISAs vs. saving accounts to help you decide where to grow and save your money.

What’s to love about ISAs?

• There are different types of ISA accounts available - cash ISA, stocks and shares ISA, help-to-buy ISA, junior ISA, innovative finance ISA - and they all have slightly different specificities. In short, it’s an easy, tax-free way to save money.

• Banks now offer fixed-rate cash ISAs that can pay up to 1.35% on your money vs. 1% for “normal” cash ISA. Worth checking.

• Since April 2017, there is a new ISA kid on the block: the LIFA or “lifetime ISA”. The Lifetime ISA was launched to help savers beef up their savings towards a deposit for a first home or  retirement. The government will pay you a 25% bonus (up to £1,000) for every £4,000 saved per year. If you’re under 40, the Lifetime ISA is definitely worth considering. More here.

• ISAs are tax-efficient, meaning that all the money sheltered in your ISA is protected from the taxman for the long-term: you won’t be paying taxes on the the interest earned. Ever.

• For inheritance, you can pass on your ISA to someone without losing the tax advantage.

• You don’t know what the future holds... The personal savings allowance can change in the future and potentially go down as interest rates and saving rates go up. You could also be earning more and lose your personal allowance when becoming a higher tax payer. But that won’t be the case with ISAs.

What are the alternatives to ISAs?

• Fixed-rate bonds: you could get higher interest rates if you are ready to invest a lump sum and lock in your money for a certain period of time (1 to 5 years). You will receive a guaranteed fixed amount of interest for this time. You can now get about 1-1.5% but make sure you are happy with the provider of these saving accounts.

• Current account: a normal current account won’t give you a high interest rate for your money but it’s worth checking what’s out there. You will have the flexibility of taking your money out at any time, but that does then not really help your savings.

• High interest current accounts: these accounts offer immediate access to your money but also much higher interest rates. However you will have to use this account as your main current account and add money monthly into it. For the best deals, you see here.

• Remember: for this tax year (2017/2018) you can get a personal tax free allowance (“PSA”) of £1,000 (£500 for high tax payers, and £0 above £150,000 income) for the interest earned on your savings.

 You don’t need to put all your money into one pocket, so decide what’s best for you.

Photo by Justin Luebke on Unsplash.