It’s ISA season!
Actually, with Easter Monday falling on the ISA cut off date of 5 April, realistically the deadline for depositing your money has already passed, especially if you were hoping to open a new account.
You might be feeling a little disappointed if you had planned to make a last minute deposit.
After all, an ISA lets you save £20,000 a year tax free.
But given how low interest rates are at the moment, do ISAs, or at least cash ISAs, still offer good value? Or would your money in fact be better off elsewhere?
What it means for you…
The answer to whether ISAs provide good value will depend on three main things: your income, the amount you have saved and your risk appetite.
Everyone has a Personal Savings Allowance that’s determined by their income tax bracket.
As a basic rate tax payer, you can get up to £1,000 in interest earnings a year without paying tax on it. If you’re in the higher rate bracket this is reduced to £500, while those in the additional rate bracket have zero.
Those on lower incomes will also benefit from the starting rate for savings, which allows you to earn up to £5,000 a year in interest without paying tax on it.
This £5,000 allowance starts to decrease once you start earning £17,500 or more a year, and eventually becomes zero.
If you’re in the additional rate bracket, having an ISA is obviously a no-brainer.
But even those on lower incomes should bear in mind that your tax bracket isn’t just determined by your income, it’s your income plus any interest rates received, including from sources like peer-to-peer lending.
So if your interest rate income might push you into the next bracket, it’s worth getting an ISA. An alternative might be to top up your pension and take advantage of the tax breaks there.
The amount of money you have saved
For everyone other than those in the additional rate bracket, the amount of money you have saved will also be important.
If you don’t have much saved, it’s unlikely your interest income will push you over the tax threshold, especially given how low interest rates are right now.
Your appetite for risk
The latest data from the Office for National Statistics has inflation as measured by Consumer Prices Index including owner occupiers’ housing costs (CPIH) at 0.7%.
If your money is in a savings account paying less interest than this, you’re effectively losing money over time.
And unfortunately, the majority of cash ISAs are paying interest rates significantly less than this, many even less than standard savings accounts.
So actually, if you are in no danger of being pushed to a higher tax bracket or having to pay tax on your interest rate, you might be better off putting your money in a standard savings account instead of a cash ISA.
If you have an appetite for risk however, it might be worth putting your money into a stocks and shares ISA where returns from investments can be much higher than interest rates and everything’s tax free.
Of course, you might also lose some or all of your money and it’s important you do your research before you make any investments.
So do ISAs still offer good value? A lot less for a lot of people compared to perhaps a few years ago – but it all depends on your circumstances.