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Assessing the best ISA options

Assessing the best ISA options

For many people, the January blues are a very real phenomenon, and after the Christmas festivities, it can often feel like it’s simply a case of seeing out the month and getting things back on track. But, hopefully with your savings hat still on, there is still a lot of scope to look ahead to the future, with a view to making the best of any money that you’ve set aside.

It isn’t the easiest task in the world, given that record-low interest rates have led to appalling returns on savings in the UK. It’s hard to believe that only a decade or so ago, getting 5 per cent on a Cash ISA was pretty standard. These days, it’s been reported that a quarter of leading providers pay savers less than 0.25 per cent!

Rather than letting money effectively sit idle, and earn returns that are less than the rate of inflation, it thus makes sense to look at other options when it comes to ISAs…

Better Cash ISAs!

The first option is to simply find a Cash ISA that pays a market-leading rate. Easier said than done, but there are some which pay on the right side of 1 per cent (AER). The Direct ISA from NS&I is a good example of this, while in the fixed-rate ISA category, Virgin Money offer an effective rate at withdrawal of 1.25 per cent after three years.

The Lifetime ISA

From 6 April 2017, a new type of ISA will be launched known as the Lifetime ISA. This is a Government bonus-backed scheme, whereby you get topped up £1 for every £4 which you save into this account. The maximum you can save into this account per year is £4,000. It’s available to anyone between the ages of 18-40, but you can contribute towards it until the age of 50. This means that, theoretically, you could earn up to £32,000 in bonus money alone. However, it is worth noting that withdrawal from this account before the age of 60 (unless to purchase a first home, or to cover medical bills for a terminal illness) will see the bonus forfeited, and a 5 per cent penalty.

Help to Buy ISA

For those looking to get on the housing ladder, the Help to Buy ISA tends to be a no brainer – depending on where you are looking to buy. Similar to the Lifetime ISA, it involves a Government bonus of 25 per cent on all contributions, and you can save up to £200 a month into this account. This means you’ll get a £50 top up each month. In fact, you can actually subscribe as much as £1,200 in the first month alone, which is worth a bonus of £300. The upper limit of the Government bonus is £3,000, meaning you’d have to save £12,000 over the course of just under five years to get there. Interest rates tend to be good too, with Barclays offering 2.27 per cent. The only caveat here is that the bonus is paid retrospectively (ie: after the purchase has gone through), and will only apply to homes which cost less than £250,000 (£450,000 in London).

The Innovative Finance ISA

Another new addition to the ISA family is the Innovative Finance ISA (IFISA), which is a wrapper geared towards returns earned from peer-to-peer lending. This involves lending your money to vetted borrowers via an online platform for a set return – although these are taxable without use of the IFISA. Peer-to-peer lending offers far better returns when compared with savings rates, but, while returns aren’t nearly as volatile as those from the stock market, it is important to note that capital is at risk, and not covered by the Financial Services Compensation Scheme.

Final thoughts

It isn’t easy in the current climate to make your money work hard for you, yet it’s important to be aware of all the options out there. Different types of ISA will be more suited to different people, depending on your situation. But as long as you keep your eyes open, and avoid inertia with poor deals, you can ensure that you earn the best possible return.

Image credit: Pictures of Money

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