Make the most of the new tax year by filling up your Isa now. And if you aren't getting a decent rate on your existing investments, move your money somewhere else, says Ruth Jackson.
With the so called 'Isa season' finally over, you probably want to put tax efficient savings out of your mind for now. But is that the best idea?
You'll be better off if youdeal with the new tax year's Isa now. That way you can make the most of your allowances. And when Isa season rolls around next March and the frenzied efforts to put money away before the end of the tax year kick off, you'll be able to ignore them, safe in the knowledge that your own savings are already protected.
This tax year, everyone is allowed to put a total of £10,200 into an Isa wrapper. Remember that the word Isa does not refer to any particular savings scheme or investment, just to the tax-free wrapper in which you can place them. Of that £10,200, up to £5,100 of your allowance can now be kept in a cash Isa. That's up from £3,600 last year. So where should your cash be going?
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If you are looking for somewhere to park this year's Isa allowance (rather than hoping to move older Isa money too) then you have two good choices.
If you have the full £5,100 to invest and are happy to lock it up until 31st May 2011 then you might go for Coventry Building Society's CallSave one-year fixed rate Isa. It pays a competitive 3.25% in interest, but does not allow withdrawals. You are also obliged to deposit the full £5,100.
If you don't have that much to invest, or if you want to be able to withdraw your money quickly, then go for Santander's Flexible Isa instead. This one guarantees a rate of 3.2% for the first year on balances between £1 and £5,100. However, it doesn't accept transfers from other Isa accounts. So you can't put in money saved in the past.
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Alliance & Leicester who are owned by Santander offer an identical Flexible Isa. If you do go for either Flexible Isa, be warned that their interest rates will drop to the same level as the Bank of England base rate after one year. Right now the base rate is a mere 0.5% - and likely to stay that way. So make a note to remind yourself to move your money on in 12 months.
Move your old Isas
The average cash Isa is currently earning just 0.41% in interest. This is because many Isas offer an introductory bonus rate that disappears after a year to be replaced by an utterly rubbish interest rate. Banks and building societies get away with this because most people don't keep an eye on their Isa interest rates, and can't be bothered to move the money anyway.
Don't be one of those people. Keep a close eye on the interest rate you are getting. Check it once a month if you have a flexible rate, or at the end of your term if you are on a fixed rate. Then, if you find you aren't getting paid a 'best buy' rate, transfer your Isa money to someone else.
The best short-term deposit rate available for Isa transfers at the moment is 3%. You can get this from the Post Office or from Julian Hodge Bank.
Both are one-year bonds, the difference being that the Post Office accepts deposits up to £5,100 while Julian Hodge Bank will only take over £5,100.
Don't lock up your money
It is possible to get more than 3% on your Isa money if you are prepared to lock it up in a four or five year bond. But while some of the deals on offer do look tempting, we aren't sure you should take them. With base rates at 0.5% and inflation constantly coming in above target the only way for interest rates to go it up.
So if you lock up your money now even at what looks like a reasonable rate - you may find that in a few years you are getting paid rather less in interest than those who kept their money in more flexible accounts. So opt for a one-year bond and leave yourself free to grab a better deal when interest rates eventually rise.
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Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.
Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.
Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.
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