One of the biggest advantages to opening an ISA account is that you don't pay tax on any of the interest earned. However, there is a limit to the amount you can save into an ISA each tax year - currently £20,000.
The Financial Services Compensation Scheme (FSCS) guarantees that it will step in to compensate the first £85,000 (£170,000 for a joint account) you have saved with a UK-authorised bank, building society or credit union in the event that the business goes bust.
You can choose from different types of ISA, with the two main types being a cash ISA and a stocks and shares ISA.
Cash ISAs work in the same way as other savings accounts, but no tax is due on the interest earned. With a stocks and shares ISA, your money is invested and the returns you make are also tax-free.
If you want to open a cash ISA, you should consider the following when comparing accounts:
One of the main benefits of choosing an ISA for your retirement funds is that you won’t pay tax on any of the interest earned.
This can be useful if you’ve exceeded your personal savings allowance. This lets basic rate taxpayers earn up to £1,000 in savings interest tax-free each year. Higher rate taxpayers can earn up to £500 in savings interest tax-free each year, while additional rate taxpayers have no personal savings allowance.
Stocks and shares ISAs can be particularly useful for longer term savings as they tend to offer better long-term returns than cash ISAs. But they are also higher risk and you could get back less than you’ve paid in.
Just keep in mind you can only invest up to £20,000 in ISAs each tax year.
The main difference between ISAs and bonds is that you don’t pay tax on the interest earned in an ISA, but you might if you have bonds (if you exceed your personal savings allowance).
If you pay money into a bond, you must leave those funds untouched for a set time – usually a year or more. During that time you earn interest on the money saved. As well as not being able to make withdrawals during the term of the bond, you also (usually) won’t be able to add further funds to your account.
This is very similar to a fixed rate cash ISA, but the difference is you won’t pay tax on the interest earned in an ISA. However, as mentioned, the maximum you can pay into an ISA each tax year is currently £20,000. Bonds are not so limited, and will also sometimes pay higher rates of interest compared to ISAs.
ISAs can be a great way to save for your retirement but they won’t always pay the best rates. Also keep in mind that there are no special benefits for over-60s so it’s important to shop around to find the right savings option for you.
Our personal savings allowance calculator will show you whether you need to pay tax on your savings – and how much.
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