ISA guide from TSBs Head of Savings

As we gear up to the start of the new tax year, TSB’s Head of Savings, Peter Hatton offers up some guidance on ISAs…

The start of the new tax year is approaching fast, and many people will be looking to ensure they're getting the most from their savings. With the Bank of England’s Base Rate currently at 4.50%, savers have been enjoying some of the best returns on cash savings for more than a decade.

This also means more savers run the risk of going over their personal savings allowance* and having to pay tax on the interest they earn on their savings.  Make sure to use your annual ISA allowance correctly.

But the current rates may not last.  The Bank of England’s Base Rate has already fallen from its peak of 5.25% and the financial markets are predicting further reductions this year.  So, choosing the right cash ISA for you means considering how to make the most of your cash savings if rates continue to fall.

Read our blog on What is an ISA?

What is an Instant Access ISA

An instant access cash ISA is great if your priority is flexibility and ready access to your savings. But this type of account usually has a variable interest rate, meaning it can move up or down, so you may get a lower return on your balance if rates fall.

What is a Fixed Rate?

If you’re prepared to lock your money away, then a fixed rate product is a good way to protect your savings when interest rates could drop, because the interest rate is guaranteed for the term of the product. Furthermore, fixed rate products often offer a higher interest rate than instant access ISAs. If you do need to access your money you will be able to but remember to check the terms and conditions to understand the penalty charge.

Read more on Fixed Rate Cash ISAs

Range of Fixed Rate Accounts

Many banks offer a range of fixed rate accounts, with different terms and different interest rates. You could take advantage of this by splitting your savings and spreading them across multiple terms – for example over a 2 Year Fixed Rate Cash ISA and 3 Year Fixed Rate Cash ISA.  This approach can help during uncertain times, because the returns from the three-year product are protected if interest rates fall in the short-term, and the balance in the other account can be re-fixed after just two years, which is good if interest rates remain stable or even rise in the meantime.

Limited Access Accounts – The advantages of both

Some banks offer limited access or defined access ISA accounts.  These can be ideal when you want a better return than you’d get from a pure instant access account, but with greater flexibility than a fixed-rate product.  For example, TSB offers the Save Well Access ISA, which offers one interest rate in the calendar months you don’t make a withdrawal, and another interest rate in any month when you do make a withdrawal.

Stocks and Shares ISA

A stocks and shares ISA is essentially an ISA used for investment purposes and many financial services providers offer them. If you’re over 18, you can choose to use some or all your £20,000 Annual ISA Allowance to invest in a stocks and shares ISA.  The returns from investments can be attractive and of course the benefit of an ISA is that you don’t pay tax on any gains.  But this approach is normally only appropriate for individuals who are prepared to put their money away for longer timescales – typically at least five to ten years.  And remember, the value of your investment can go down as well as up.  Always make sure you do your research before investing and consider seeking financial advice.

Other ISAs are available

Another ISA option available is a Lifetime ISA.  This is specifically to put money aside for a house or for retirement.  This option is worth considering if you’re aged between 18 and 40 and planning for your retirement or to get on the property ladder.  You can contribute up to £4,000 each year, and the government will add a 25% bonus, up to £1,000 each year.  More information on this can be found here Lifetime ISA - gov.uk.

If your child is under 18 and living in the UK, you can open a Junior ISA or Junior Stocks and Shares ISA. Like other ISAs, the gains you make are tax-free. The maximum limit for a Junior ISA in the tax year is £9,000. It’s a great way to save for your kids’ future but remember you can’t take money out of a Junior ISA until the child turns 18 – so this isn’t a good option if you think you might need access to the funds.

Whichever you choose, as long as it’s in an ISA, all the interest you earn will remain free of tax. Read our ISA guide for more information.

*If you're a basic rate taxpayer, you can earn up to £1,000 a year in interest without having to pay tax. If you are a higher rate taxpayer, you can earn £500 a year without paying tax.

18+ and UK resident only. Tax treatment depends on your individual circumstances and may change.

TSB Bank plc is covered by the Financial Services Compensation Scheme and the Financial Ombudsman Service