With the new tax year now just weeks away, ISA season is officially here.
Tax-savvy savers will be counting down the days, readying themselves to take advantage of their 2018/19 tax year ISA allowance.
And there’s already been some good news. Research by Defaqto – a financial information service – shows that cash ISA rates have increased for the first time in seven years, in some cases growing by 31%. It’s a sign that the Bank of England’s decision to increase the Bank Rate for the first time in a decade last November might finally be filtering through to consumers.
But there’s a catch. To secure a rate anywhere near the level of inflation, which currently stands at 3%, you’re going to have to lock up your money for a fixed-term of at least five years. Even then, the best rate Defaqto could find was just 2.25%. For an instant cash ISA, you’re still only looking at an average of 0.72%.
For those wanting to target a higher return without locking it away, there are other types of ISA available. However, this will mean putting your money at risk.
Perhaps the most well known is the stocks and shares ISA. There’s now over £315 billion invested in them, making them even more popular than cash ISAs. But many people won’t be comfortable with the ups and downs that come with investing in the stock market, and may want a less volatile option for putting their ISA money to work.
The innovative finance ISA is one example. Launched by the government in 2015, it allows investments made through peer-to-peer lending to be included in the ISA wrapper, too. Remember, though, It’s still not the same as saving in a cash ISA – it’s possible you could get back less than you initially put in.
The last decade has been a tough time for cash ISA savers. Years of low interest rates and high inflation have curbed the effect of the tax-free wrapper on household savings. Glimmers of improvement are finally beginning to shine through, and more interest rate increases look to be on the horizon. But for those keeping their money in cash, it’s still only early days.