An ISA, or Individual Savings Account, is a type of savings account that allows you to save money and earn interest tax-free. ISAs are available from banks, building societies, and other financial institutions.
There are two types of ISAs: Cash ISAs and Stocks and Shares ISAs. You can open one type of ISA every tax year, but you can only pay into one Cash ISA and one Stocks and Shares ISA in each tax year.
The amount you can save into your ISAs each tax year is called the Annual Allowance. The Annual Allowance for the tax year is £20,000, meaning you could save up to £20,000 across all of your ISAs in the tax year.
If you don’t use your Annual Allowance in one tax year, you can carry it forward to the next tax year and save up to £40,000 in the following tax year. The money you save into an ISA is yours – you can withdraw it anytime without paying any taxes or charges.
You can hold bonds or trusts in Stocks and Shares ISAs. When looking for an ISA account, the best one will depend on your goals. There are a few fundamental things to consider when looking for the best ISA account for you:
The interest rate
When looking for an ISA account, the interest rate is one of the most important things to consider. The interest rate is the amount of money you will earn on your savings, expressed as a percentage.
For instance, if you have £1,000 in an ISA account with an interest rate of 2%, you will earn £20 in interest over a year.
The best way to compare interest rates is to use an interest rate calculator. It will allow you to see how much interest you will earn on your savings over time and compare different interest rates side-by-side.
The term
Another essential thing to consider when looking for an ISA account is the term. The term is the length of time that you agree to leave your money in the account.
For example, if you open a one-year fixed-rate ISA, you will agree to leave your money in the account for one year. At year-end, you can withdraw your money without paying any penalties.
The term of an ISA can range from a few months to several years. The longer the term, the higher the interest rate is likely to be.
Access to your money
When looking for an ISA account, it’s essential to consider how easy it will be for you to access your money. Some ISAs restrict when and how you can access your money, while others allow you full access at all times.
For example, some Cash ISAs have a notice period, which means you need to give the bank or building society notice before withdrawing your money. With a notice period ISA, you may be able to access your money sooner if you are willing to pay the penalty.
The minimum deposit
When looking for an ISA account, it’s essential to consider the minimum deposit. The minimum deposit is the smallest amount of money you need to open an account.
For example, some Cash ISAs have a minimum deposit of £1,000, while others have no minimum deposit. The minimum deposit varies depending on the bank or building society.
The fees
When looking for an ISA account, it’s essential to consider the fees. Some ISAs have annual fees, while others have no fees at all.
For example, some Cash ISAs have an annual fee of £10, while others have no annual fee. The annual fee varies depending on the bank or building society.
Bonus rates
When looking for an ISA account, it’s crucial to consider bonus rates. A bonus rate is an introductory interest rate usually only available for a limited time.
For example, some Cash ISAs offer a bonus rate of 2% for the first 12 months, after which the interest rate drops to 1%, meaning you will earn more interest in the first year than in subsequent years.
Bonus rates can vary depending on the bank or building society, so it’s essential to compare different offers before opening an account.
The bottom line
Opening an ISA account is a great way to snowball your savings. Even though the interest rates are not massive, they can certainly accumulate over time and become substantial. The fact that ISA gains do not have to be taxed adds to their appeal, and many UK investors see it as one of the many viable options to grow their wealth over time. If you would like to get started, you can usually set up an account with a bank or a broker.