Savings review

01 March 2012
Volume 28 · Issue 3

Is an Isa for you, asks Mark Blakeman?

With the end of the tax year fast approaching, it is the perfect time to review your savings to make sure you are getting the most from your money.

Individual Savings Accounts should be an important part of any savings portfolio, whether you are saving for your retirement, your children's education or simply a luxury item like a holiday or new car.

Why save into an ISA? One of the key benefits of an ISA is that you don't pay income or capital gains tax on your savings, as you may with other savings or investment products.

There are two types of ISA – cash and stocks and shares. Most cash ISAs resemble bank and building society accounts, but can also be bought through investments such as unit trusts, which tend to invest in monetary deposits. Stocks and shares ISAs are usually made up of one or more investment funds or individual stocks and shares.

Is there a limit to the amount I can invest? Because of the tax advantages of an ISA, there is a limit to how much you can invest each year. From April 6, the limit increases from £10,680 to £11,280. The full allowance can be invested into a stocks and shares ISA, or up to half into a cash ISA, with the remainder in stocks and shares

Which ISA is best for my needs? When deciding which ISA to invest in, you need to think about how long you want to save for and what your savings objectives are, as well as the risk you are prepared to take with your money.

For a short-term investment that allows easy access to your money – if you are building up an emergency fund, for example – then a cash ISA will probably be the best option.

Over the longer term, share-based investments may prove a better option as they generally produce the best returns over longer periods of time, although past performance is not a guide to future performance.

While the stock market has been volatile in recent years, the Barclays Capital Equity Gilt Study 2011 has shown that over a ten year period there is a 92 per cent probability of shares outperforming cash.

Shop around

There are many companies offering ISAs and it can be hard to know how to choose the right one for your needs. One of the important things to consider before you commit is the financial strength of a provider. Financial strength means a company can meet its ongoing guaranteed or promised commitments and it is usually measured by the amount of money a provider has left over after it has met all its liabilities.

With inflation still high and interest rates at an all time low, it is now more important than ever that you shop around. If you already have an ISA, check that it is still competitive as providers often draw customers in with headline rates that aren't maintained so it's worth taking time to compare accounts and transfer your existing ISA if there are better alternatives.

Conclusion

Putting money into an ISA over a number of years can earn you a significant amount in interest. According to research carried out by Wesleyan last year, 37 per cent of dentists said they would use ISAs to help save for their retirement, with only property ranking higher.

The end of the financial year is on April 5, so time is running out to take advantage of this year's full ISA allowance. If you need help in deciding which options are best for you, it is sensible to take advice from a financial adviser who has a good understanding of your circumstances and the dental profession.