With just two months left until the end of the financial year, the beginning of February has become the traditional start of the annual ISA season.
Over the next few weeks, banks and other financial institutions will be introducing a variety of special deals to tempt savers who haven’t used up their tax-free allowance to invest before the deadline of 5 April.
Individual Savings Accounts (ISAs) have grown into a British success story since being introduced by Gordon Brown in 1999 as a replacement for PEPs. HMRC statistics show that in the year 2010/11 we subscribed to 15.4 million ISA accounts, which were collectively worth £54 billion.
Despite this astonishing total, however, not everyone is benefitting. Research by Moneywise found that around 30 per cent of people are missing out on their allowance, much to Moneywise editor Johanna Gornitzki’s disapproval.
She says: “For any saver, a cash ISA should be the first port of call, because any interest earned will go straight into your pocket rather than the taxman’s coffers.”
The reason for this could be that many people – including everyone we asked in a spotcheck in the pub – are vague about the limit that can be put into an ISA. In fact, the 2011/12 allowance is more generous than in previous years, with every adult allowed tax-free savings of £10,680.
Savers can put the whole amount in an investment, or stocks and shares, ISA. Or you can take the more cautious route and split it, putting up to half (£5,340) into a cash ISA.
The two halves do not have to be saved with the same provider, and of course you do not have to have both. According to HMRC, cash ISAs remain the more popular option, accounting for 78 per cent of subscriptions at the last count, a proportion that has remained stable for years.
The key question when signing up for a cash ISA is how flexible you need it to be, as the best rates are on accounts where your money is tied up for years. For example, putting a minimum of £500 into a fixed-rate ISA with Halifax for five years gives 4.40 per cent (or 4.30 if you choose four years).
If you tie up your cash up for three years, you can choose from a number of deals, including a 3.70% rate ISA from the Post Office, again with a minimum of £500.
The best rates on instant access accounts are punier, with only a few deals over three per cent. They include the Internet Access ISA from the AA, with a rate of 3.05 per cent (though this includes a one-year-only bonus and you will have to move your money at the end of that term to avoid the rate being reduced to a pathetic 1.7 per cent).
While these are among the best deals at the time of writing, more are bound to pop up during February and March. So before parting with your cash, keep a keen eye on the best buy tables at Money Supermarket, Money and Moneyfacts.
Once you have stashed your cash safely away from the taxman, you can start all over again come 6 April, because the good news is that in the tax year 2012/13, the ISA tax-free allowance will again rise, to £11,280 overall, or a cash ISA limit of £5,640.