Now’s your chance to use this year’s tax-free ISA allowance - but don’t assume cash savings is the only place for your money…
It’s a brand new tax year and if you want to make the most of the new allowance then you should move fast. After all, the sooner your money is safe in its tax-free ISA account, the sooner you can protect your returns from tax. And if you don’t have a lump sum you want to save, it’s still worth investing what you can early in the tax year.
The good news is that ISAs, or individual savings accounts, have really had a makeover in the last few years, with the government loosening the rules on what you can save and how much.
In fact, there’s a lot more choice and ISAs have never offered so many different opportunities.
Wait, should I not save cash?
You can save into a cash ISA of course. In fact, doing so can be a sensible idea; it’s generally recommended that you try to save between three and six months’-worth of salary as an emergency fund to help cover any unexpected disasters.
That rainy day fund can be saved in a number of places. You can save into a cash ISA and know that your returns will always be tax-free, or you can stash your money in a standard savings account and rely on the personal savings allowance to keep your returns safe from the tax collectors.
That allowance means that you can earn up to £1,000 a year on your savings without troubling the taxman at all. If you’re a higher rate taxpayer you can earn up to £500.
But once you’ve got some cash savings sorted, you might want to take a look at what else you can do with your money. Because ISAs go a heck of a lot further than an easy access savings account.
Okay, excite me about ISAs
We can certainly try although it will probably help if you’re very excitable. Not only has the government extended the ISA allowance so that it’s now £20,000 a year, it has also relaxed the rules and launched some new options.
On top of the traditional cash ISAs there have always been stocks and shares ISA accounts, where you can hold investments tax-free.
But now you can also save for your children into Junior ISAs, you can save for your first home or retirement using a Lifetime ISA, or you can put your money into the all-new innovative finance ISA.
An inny-finny what-now?
Widely known as an IF ISA (presumably because InFinISA sounds more like a Harry Potter spell than a serious financial product), the innovative finance ISA is a way to invest or save into peer-to-peer lending.
As with other ISA products, any returns are sheltered from tax and they can promise a pretty good return to investors who are willing to accept the higher risks of P2P lending.
For several years, it’s been possible for individuals and businesses to borrow from other individuals, essentially cutting the banks out of the equation.
That’s been good news for borrowers who have been able to secure very competitive rates and it’s been good for most investors, who’ve often been able to earn far more on their money than they would in a savings account.
With an easyMoney IF ISA, for example, the expected return is up to 7.28% a year on business loans secured against UK property, which is way above the average easy access ISA account. On top of that you get a snazzy orange card that gives you a range of discounts at some of Britain’s biggest retailers. Yes, we said snazzy.
Can I transfer my existing ISA?
Yes, you absolutely can. You can transfer cash ISA savings, a stocks and shares ISA or even an existing Innovative Finance ISA if you were one of the very early adopters.
All you need to do is open an easyMoney ISA account, click on ‘transfer an ISA’ and fill out the form.
Wait, is this really risky?
The reason that IF ISAs can offer higher potential returns than cash savings is because the risk is greater. That’s the deal; it’s a slightly bigger gamble in exchange for a bigger potential return.
Pretty much every IF ISA provider takes steps to keep that risk as low as possible. For example, easyMoney lends to property professionals who want short-term finance secured against UK property (we have a whole risk explainer here if you want to learn more).
The point is that cash is useful but it isn’t the only way to save for your future. Both stocks and shares, and Innovative Finance ISAs are straightforward ways to start investing without having to have your finger on the pulse of what’s buying and selling on Wall Street!
So it’s worth sitting down with a cup of tea and taking a good look at your ISA options. Don’t leave it too late and miss a big chunk of tax-free time on your 2018/19 allowance - and don’t assume a cash account is the only option for you.
There’s far more to ISAs than cash. What’s right for you will depend on your circumstances and what level of risk you’re comfortable with – just make sure you know what’s available so you don’t miss out.