What ISA should you go for?

If you're confused about which the right option might be for you, follow our guide to help you decide the best place to shelter your savings.

18:39 28 March 2013

There are just days to go before the end of the tax year on April 5, but being uncertain about where to invest this year's allowance, could cause further and unnecessary delays

 

This tax year you can invest up to £5,640 in a cash ISA, and the same amount in a stocks and shares ISA. Or you can invest the full £11,280 allowance in stocks and shares.

If you're confused about which the right option might be for you, follow our guide to help you decide the best place to shelter your savings from the taxman.

 

Stocks and shares or cash?

 

Whether you choose to invest in a stocks and shares ISA or a cash ISA, or a combination of the two, will depend on your approach to risk, as well as your investment objectives. For example, if you aren't willing to accept any risk at all, or are investing over a short-term period, then cash is going to be your best option.

However, if you are prepared to accept some risk, and are investing for at least five to 10 years, you may want to consider putting some of your allowance into stocks and shares in the hope of greater potential rewards than cash savings can provide.

Darius McDermott, managing director of discount broker Chelsea Financial Services said: "Investment ISAs are available to everyone, not just the rich. You can invest as little as £25 per month and can keep costs to a minimum by using a fund supermarket or discount broker."

 

Spread your risk

 

If you are happy with the risks involved with stocks and shares, then bear in mind that nobody can predict which investments or sectors will perform the best, so it is important to make sure you don't have too much money in one asset class or sectors.

Patrick Connolly, of independent financial advisors AWD Chase de Vere, said; "You should spread your money across different assets such as equities, fixed interest and commercial property, but make sure this is in the right proportions to meet your objectives and attitude to risk.

"For many investors, the best way to achieve this is through buying a range of underlying investment funds such as AXA Framlington UK Select Opportunities, BlackRock UK Special Situations, Henderson European Growth, HSBC American Index, First State Global Emerging Market Leaders, Kames Strategic Bond and M&G Property Portfolio.

"For those making their first investment, or where they don't have enough money to invest across a wide range of funds, it is possible to achieve adequate diversification in just one multi-asset fund. For example, the Cazenove Multi Manager Diversity fund invests a third in equities, a third in cash, and a third in alternative investments and so should be well positioned to guide investors through difficult times."

If you aren't certain which fund or funds to choose, or if you aren't sure that stocks and shares ISAs are right for you, always seek independent financial advice before investing.

 

Top accounts for cash ISA savers

 

If you aren't comfortable investing this year's ISA allowance in stocks and shares, then the good news is that recent weeks have seen the launch of several competitive cash ISA accounts.

 

The current market-leading variable rate cash ISA is Santander's Direct ISA Saver (issue 1), which pays 2.50% (variable) for the first 12 months. The rate will then drop to a variable rate, currently paying 0.50%. You'll need a minimum £2,500 to open the account which accepts transfers in.

 

Cheshire Building Society's ISA Saver account, is also easy access and pays a lower annual interest rate of 2.30% tax-free, although you only need a £1,000 minimum deposit. The rate includes a 2.00% bonus payable until July 31, 2014 and, again, you can also transfer in money held in existing ISAs.

Other variable rate deals include Tesco Bank's Instant Access Cash ISA which pays 2.30% annual interest tax-free. This rate includes a 0.30% bonus for a year, and can be opened with a minimum investment of £1. But you cannot make transfers into this account from previous years' ISAs.

Similarly, GE Capital Direct's GE Saver Cash ISA pays 2.25% tax-free on a minimum investment of £500, but again this account doesn't accept transfers from existing ISAs.

If you want an account that does accept transfers, Barclays Bank Instant Cash ISA Issue 1, pays 2.30% but on a large minimum investment of £30,000. For balances below £30,000, lower tiered rates apply, starting from 2.10%.

Other instant access ISAs which accept transfers in, include NatWest and Royal Bank of Scotland's e-ISAs, both of which pay 2.25% tax-free on balances of £30,000 or more, and Nationwide Building Society's Web ISA Issue 2, which pays 2.25% on a minimum deposit of £10,000. However, new customers will need to open a card account with Nationwide before they can open this account.

The rate includes a 1.75% bonus until the end of August next year, so savers will need to move their money once this disappears.
 
Fixed rate cash ISAs

 

Savers who are prepared to tie up their savings for a year or more may want to consider a fixed rate ISA, as these often offer the highest rates of interest. However, bear in mind that most accounts don't allow withdrawals, so you must be certain you can afford to leave your money untouched for the fixed term.

Santander's recently launched MAJOR ISA 2 Year Fixed Rate pays one of the most competitive fixed rates of interest, paying tax-free 2.80% a year plus an additional 0.10% bonus if Rory McIlroy wins an eligible golf 'major'.

If you have a Santander 123 current account or 123 cashback credit card, you will benefit from an even higher rate on the Major ISA as the '123 Exclusive' version of this account pays 3.00% tax-free fixed for two years, plus an extra 0.10% if Rory wins a major.

NatWest and Royal Bank of Scotland have also just launched new two-year fixed rate ISAs, paying 2.25% annual interest tax free on a minimum investment of £1,000.

Other competitive fixed rate ISAs include Halifax's ISA Saver Fixed one and two year accounts, which pay 2.05% and 2.50% annual interest tax-free respectively on a minimum investment of £500.

Nationwide has also recently upped the rate on its 2-Year Fixed Rate ISA to 2.50% in return for a minimum investment of just £1, which is great for beginners. But you'll have to go into a branch to open it as it's not available by post, online or on the phone.

 

Remember! The end of the tax year on April 5 might not always be the final deadline for ISA applications so have a read of Melanie Wright's article, ISA deadlines; Use it or lose it! to find out when each provider is closing its doors.

 

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.