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ISA season: Three pros and cons, plus why it might be time to get involved

Written by: Ewan Edwards
As we’re nearly a quarter of the way through 2023 and in the midst of ‘ISA season’, it feels an opportune moment to take stock of what it’s been like for savers so far this year.

The Bank of England increased its base rate to 4%, with most experts anticipating a further rise in the coming months. Where interest rates will end up come the end of 2023 remains uncertain.

But at the very least, we should be able to look forward to a few more months of intriguing, healthy competition in the savings market. Rates for customers may increase further across all product types – whether easy access, fixed rates or Individual Savings Accounts (ISAs).

Talking of ISAs, we are well and truly in the midst of ‘ISA season’, ahead of the new tax year beginning 6 April. Now is a great time for savers to get their ducks in a row, especially those with any remaining tax-free ISA allowance. These allowances don’t roll over, so it’s vital that savers ‘use it or lose it’ ahead of 6 April.

Banks and building societies compete for customers’ attention during ISA season, offering improved rates – Aldermore included. This is great news for savers, giving them plenty of choice when it comes to where they invest their cash.

The advantages of an ISA

1) ISAs are a tax-efficient way of saving in the UK.

This is because the money you invest with your annual allowance will keep its tax-free wrapper for future years. So for example, if you put £20,000 into your ISA this year it will continue to earn tax-free interest over the future years, providing that the funds aren’t withdrawn. And remember, your Personal Savings Allowance is separate from – and doesn’t count towards – your tax-free ISA allowance, meaning that you could make further savings. During a cost-of-living crisis, this is an even bigger bonus than it is usually.

2) There’s plenty of choice for customers who are considering investing in an ISA.

In the cash ISA market customers can choose from a fixed or variable ISA, whilst there are other ISAs available such as stocks and shares ISAs, Lifetime ISAs and Innovative Finance ISAs (IFISAs). In a nutshell, if one type of ISA isn’t quite right for you, there’s a good chance that another will be.

3) ISAs can be transferred to other providers if you see a better rate or deal.

Of course, it’s important to ensure that you transfer your ISA correctly, to ensure you don’t lose the tax-free status. In all circumstances, you should seek advice from the potential provider before transferring your ISA.

Potential pitfalls to consider

1) There is a £20,000 contribution cap.

So, whilst an ISA will work well for many savers, for those with larger amounts to invest, there may be better options available.

2) ISAs can only be held in sole names.

Therefore, you won’t be able to hold an account jointly with someone else, which some people may want to do e.g. spouses.

3) You can’t carry forward your tax-free allowance into a new tax year.

It really is a ‘use it or lose it’ type of policy. This is perfectly fine for those savers who have a clear plan of action, but for those who want a super straightforward option where they don’t have to consider the tax implications, it’s certainly something to consider.

What does the UK public think of ISAs?

Aldermore commissions an annual Savings Tracker survey to monitor the attitudes and behaviours of savers in the UK, with the most recent edition of the tracker being completed during the last three months.

Within the Savings Tracker, we’ve found some revealing insights into how many people claim to have an ISA and the types of ISAs that are most popular.

When we asked people how much they agreed or disagreed with the following statement: “Every financial year I review ISA / savings rates and change provider accordingly”, nearly four in 10 UK adults who do save agreed with this statement.

On a nationally representative scale, that equates to a whopping 14 million people who claim to review savings and ISA rates in order to get the best deal. The UK market for savings has always been competitive and resilient, as borne out by these latest findings.

When we asked people which type of savings accounts they held, they revealed:

  • 33% have a cash ISA (17 million people).
  • 14% have a stocks and shares ISA (equivalent to 7.5 million people).
  • 3% have a lifetime ISA (1.6 million people) and a little under 1% have a portfolio ISA (330,000 people).
  • 11% (6.1 million people) have a children’s savings account such as a junior ISA, held in their child’s name.

The appetite for ISAs is huge, and they continue to be an incredibly popular way for many of us to stash away our hard-earned savings.

The case (and time for) ISAs

In conclusion – and as we approach the end of the tax year – the weeks ahead are a fantastic opportunity to consider an ISA and refresh your general savings goals. We’re still enjoying a rising rate environment, a welcome change to the relatively stagnant returns that we’d seen for several years. Inflation is predicted to reduce in the months ahead, and there’s a very real possibility of some savings rates cooling or even receding.

Whether you’re looking to build up a smaller rainy day fund or you’re an experienced, wealthier saver with significant capital to invest, there are options out there for everyone. Now’s the time to shop around, assess those options and make sure your money is invested in the most effective way possible.

Ewan Edwards is director of savings at Aldermore    

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