Saving money into an Individual Savings Account (aka an ISA) is one of the easiest ways to earn extra money on your savings. Unlike standard savings accounts, all the interest earned on money in an ISA is tax-free - so in other words you receive more interest.
Saving into a cash ISA is like saving into a regular savings account, whereas stocks and shares ISAs give savers the chance to make bigger gains on their money by investing in the stock market.
So that you don't forfeit these benefits, it's important not to make any of these ISA blunders:
Not using your full ISA allowance
You'd need to pay in a whopping £1,666 a month to use your whole 2045/25 ISA allowance which is £20,000. With a figure that large, it's tempting to not save at all, but even little amounts can really start to add up and make a difference - you can set up a direct debit for as little as £25 a month.
Only paying in at the last minute
Think about it: the more money there is in your ISA, the more interest you'll receive. We're talking hundreds of pounds versus a matter of pence.
Not all of us can afford one-off payments in the thousands, but consider making regular payments throughout the year instead of cramming in your cash before deadline day (5 April).
Moneycomms.co.uk.
Paying into a stocks and shares ISA on a monthly basis is often referred to as 'drip-feeding'. Aside from the interest benefits, this practice also prevents you having to work out when is best time to invest - otherwise known as timing the market, which is risky business.
Not keeping up to date with changes in ISA rules
ISAs have been around for 25 years this year, and there have been a lot of changes in what types of ISAs there are and how you can use them. Many people, after they have opened an ISA, tend to leave it well alone, but new rules coming in this next tax year give greater flexibility to how you can move your money around.
The key changes, in a nutshell, include:
- An increase in the age for opening Cash ISAs from 16 to 18. This is in line with the age requirement already in place for opening Stocks and Shares, Innovative Finance and Lifetime ISAs.
- Allowing savers to open and hold multiple ISAs of the same type (except for Lifetime ISAs) in the same tax year.
- Allowing partial transfers of current year ISA subscriptions between ISAs – before it was 'all or nothing'
Make sure that you are making the most of the new rules to take greater control of your finances and to help your savings grow.
Leaving your money in a low-interest ISA
to compare interest rates.
Withdrawing cash
Even if you intend to pay the money into a new ISA, never withdraw cash from an existing ISA without checking the terms and conditions. As soon as you do this, you could lose the tax benefits. Some allow you to make unlimited withdrawals, while some specify a limited amount. There are set rules on how to transfer over ISAs so make sure you stick to them.
Only saving in cash ISAs
is best for your needs is an important step.
Provided you won't need to access your money for a reasonable amount of time (five years is a helpful, but by no means absolute guideline) you should a consider stocks and shares ISA.
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Stevenson calculates that a saver who put £1,000 in an average cash savings account 10 years ago would have earned £106.71, compared to £1,094.70 if they'd invested the same amount over the same time frame in stocks and shares.
Investment company AJ Bell calculated that investing £3,000 a year, equivalent to £250 a month, from the launch of ISAs a quarter-century ago would have produced £254,616 if invested in a global equity tracker, or £173,142 if invested in a UK equity tracker. By contrast, if that same £3,000 sum had been put into a cash ISA each year, it would now only be worth £97,372.
Losing track of your old ISAs
ISAs celebrate their 25th birthday this year, so they've been around for a while. If you have been investing in ISAs for a few years, you could have forgotten about some old accounts, especially if you only deposited small amounts of money in them. Performance of Stocks and Shares ISAs can go up or down, which means your old ISAs might not be doing as well for your money as they could be.
The good news is you can easily transfer and consolidate your old ISAs into new ones subject to the terms and conditions of your account. Transferring doesn't affect your ISA allowance and it can tidy up your finances.
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