ISAs are best because of their tax free status. For older savers, in particular, there are benefits in maximising the tax free allowance
With the savings limits for older investors about to rise, this is a good moment to consider whether you are getting the most out of your Individual Savings Account (ISA). And even whether investing in an ISA still makes sense.
From October 6, savers who are over 50, or will be 50 by April 5 next year, will have their ISA savings limits increase. The benefit of investing in an ISA is that the interest is tax free.
One of the problems with ISAs is their complexity can put people off. But it is worth understanding them – legitimate tax-free income is worth having.
At present, any person can invest up to £7,200 each year in ISAs. Next month, this will rise to £10,200 for the over 50s. Of this, £5,100 can be put in a Cash ISA (up from £3,600). A further £5,100 can go into an equity ISA, invested in stocks and shares.
Whether this is a good moment to put money into equities depends on your view of the prospects for the economy and whether share prices are at present undervalued or overvalued.
Following the rally in share prices since the spring, many analysts believe prices will now either stagnate or fall. Those who are more optimistic and convinced that the recovery is properly underway expect them to rise further.
But with the Bank of England base rate stuck at 0.5%, there is a widespread feeling that this is not a good time to put money into cash savings.
The truth, though, is that this is a very good moment to pick your savings products carefully. The difference between the best and worst savings rates is significant.
Yet this is a fact barely noticed by many consumers. A survey just conducted by Investec Private Bank found that more than a third of savers do not know even roughly how much interest they earn on their savings.
This is especially true in Northern Ireland, where none of the dominant big four banks offers a cash ISA paying more than half a per cent interest on smaller balances.
The best of the local banks is Ulster, whose cash ISA starts at 0.50%, rising to 2.25% on balances over £35,000.
It also offers a higher rate ISA bond.
The best rate available from Northern Ireland’s financial institutions comes from the City of Derry Building Society. It pays 2.25% on savings between £1,000 and £9,999, rising to a top rate of 3.00% on balances over £50,000. At the top rate, this virtually matches the best of any institution in the UK. (The very best, Manchester Building Society, pays 3.01% on balances over £1,000.)
The largest Northern Ireland building society, the Progressive, also outdoes the banks. Progressive pays 1.20% for smaller balances, rising to 2.00% on balances over £30,000.
It is not necessary to stick with an ISA provider just because you already have an account opened and many savers could substantially increase their ISA returns if they switch.
The best cash ISA transfer in the UK, listed by Moneyfacts, is offered by the Leeds Building Society, at 4.60% — a substantial improvement over the rates offered by our local banks.
This is available to Northern Ireland savers by post, but as it is a five year fixed rate bond, it locks savers in for a long time.
ISA or savings account?
But savers should also consider whether an ISA is always their best option, especially if they are not paying tax at the top rate. Some regular savings accounts are paying substantially more than are cash ISAs.
Halifax, RBS and NatWest all offer a fixed rate of 5.00% on regular savings accounts, requiring a minimum payment of £25 a month.
Minimum opening deposits with RBS and NatWest are £250, and with the Halifax £500.
Even some easy access savings accounts outperform many cash ISAs and some fixed period savings accounts.
Coventry Building Society is currently offering a postal easy access savings account with an interest rate of 3.30% (including a one year 1.30% bonus), requiring a deposit of £1,000.
Egg’s savings account pays 3.25%, with a minimum deposit of just £1 (the rate includes a 2.00% one year bonus).
Tax free is best
But, other things being equal, ISAs are best because of their tax free status.
For older savers, in particular, there are benefits in maximising the tax free allowance. While pensions savings are also tax free, ISA savings offer greater flexibility.
It is reported, though, that some financial institutions are having difficulties in getting their IT systems adapted to cope with the changes in ISA limits for the over 50s.
Our local banks and building societies say the issue is not affecting them.
Colin Jeffrey, chief executive of the City of Derry Building Society, says it is not a problem. “We are working on it at the moment,” he explains.
Geraldine McKee, investment manager at the the Progressive Building Society says: “Our IT will be able to accept them.”
Northern Bank and Ulster Bank also say it is not a problem. First Trust Bank is in the process of contacting all eligible customers to advise them that they can increase their ISA investments.
The one exception is the Bank of Ireland — which does not offer cash ISA accounts.