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Money: Happy new tax year – and it’s a bright outlook for the smart saver

It's the time of year when people are looking at their ISAs
It's the time of year when people are looking at their ISAs

ISA providers are jostling for savers’ attention ahead of the new tax year – and the market is looking brighter for savers, with some providers increasing their rates.

The average cash ISA rate, including fixed and variable deals, stood at 1.32% in early March, according to Moneyfacts. A year ago it was 1.13% while in 2017 it was a paltry 0.82%.

Rachel Springall, a finance expert at Moneyfacts, says “table-topping” deals have appeared recently.

ISAs traditionally had advantages over other types of savings accounts, with money ring-fenced from tax. But the personal savings allowance, launched in 2016, means up to £1,000 of income from savings is now tax-free for basic taxpayers. Higher-rate taxpayers have an allowance of up to £500.

However, while money held in ISAs is ring-fenced from tax while it is in the account, savers with cash in non-ISA accounts may one day have to pay tax on interest.

The annual ISA allowance is £20,000.

Unsure where to start? Here’s how to make the most of what’s on offer…

Decide what type of ISA you want

As well as the simple choice of cash or stocks and shares ISAs, there are Junior ISAs for children.

There are also Innovative Finance ISAs, with peer-to-peer loans (peer-to-peer lenders match up people looking to invest cash with those wanting to borrow). The rates of return can be higher than cash ISAs but there are risks.

Shop around

“It’s easy to switch ISAs,” says Springall, “and most of the best deals allow transfers from other cash ISAs.”

She suggests savers check terms and conditions before arranging a move from one ISA to another – and avoid cashing in the account to reinvest, as the money will lose its tax-free status.

Think about the long term

Stocks and shares ISAs may produce higher returns over longer periods. Savers must be prepared to endure the fluctuations of the market, which could mean losing money. Sarah Coles, a personal finance analyst at Hargreaves Lansdown, says that ISAs can be a “vital part of the retirement income jigsaw”. Depending on the rules around your product, you could dip into ISA savings before accessing your pension – useful if you go part-time before you retire.

There’s also the Lifetime ISA, for people buying their first home or saving for retirement, which comes with a government bonus. But there are restrictions around withdrawals. There is also the Help to Buy ISA for first-time buyers, with a government bonus.

Consider whether or not to put all your eggs in one basket

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, says: “A stocks and shares ISA allows you to spread your savings across a range of investment vehicles, such as bonds, equities and funds. While a more risky option than a cash ISA, the value of a stocks and shares ISA tends to manifest itself over the long term with returns superior to that offered by cash.”