How to choose the best ISA?
You can invest your full ISA allowance of £20,000 into one ISA or split your allowance between the three types of ISA available. Cash, Stocks and Shares and Innovative Finance. However, this leaves the question of how to choose what works best for you?
How to choose the best ISA?
Firstly, you need to work out whether a single ISA or a combination of ISAs is going to suit your needs.
Many people are turning towards investment due to the falling interest rates which banks are providing at the moment. It’s not a guaranteed way to make any profit but it does generally produce far higher returns when it goes well.
However, you are guaranteed a fixed rate of interest in a cash ISA. They are designed to protect your capital, so many people feel that this is the safer option. Particularly, if you’re not in a stable financial position where losing money would cause financial problems. The security is exchanged for a much lower pay off.
What are my Options?
- Pay a stable rate of interest. Fixed Cash ISAs tend to have the highest rates
- A Fixed Rate ISA would provide you with a guaranteed amount, meaning you will know what your end total will be. However, you are normally required to tie up your money for a period of time
- If you need flexible access to your account then Variable Cash ISAs are a good call as they are more likely to allow you 24/7 access to your money
What to Consider when choosing a Cash ISA provider?
- Whether the ISA is flexible or fixed rate, this will determine the rate of interest you receive
- If you are likely to transfer in the future, fixed rate ISAs tend to charge a penalty whereas variable ISAs tend to be more flexible about transfers
- Whether you need online banking, most providers offer this now but not all
- Look for accounts with the highest rate of interest or switching deals
- Make sure the account you have chosen accepts transfers in, if you’re planning to switch
- Some ISAs require large minimum deposits whereas some don’t. Make sure you find one that suits your needs
Stocks and Shares ISA
A Stocks & Shares ISA is a tax-efficient and flexible way to invest in the market.
- A good way to protect your investments as anything you place into the ISA or earn in profit will be sheltered from capital gains tax and any further income tax
- An option to put away a little money each month or investing some spare cash, you could possibly receive a higher return on your savings when compared with a standard ISA
- Many accounts now offering managed portfolios for you, it is now easy for people to begin investing as no experience is required. This also works for very busy people
It’s always worth remembering however, that there is an element of risk involved and you could end up with less than you originally invested. Investment ISAs are viewed as a long term investment, usually for a minimum of 5 years.
What to Consider when Choosing a Stocks and Shares Provider?
- Assess the level of risk you’re willing to take, most providers can filter assets depending on the level of risk you’re willing to take or even provide you with a ready-made portfolio
- Low risk investing tends to focus on bond funds which pay interest or dividends regularly, whereas higher risk portfolios tend to focus on property investment and the stock market
- Some providers hold a limited amount of carefully selected options to invest in whereas others have a much larger range of funds. Work out which is right for you
- Some providers have a simple interface with clear copy about each investment and its past performances. Make sure you find one that you find easy to use, helpful and clear
- Be careful of management charges and account fees. All investment ISAs have some form of charge, whether that’s a trading fee or an account management fee. Make sure you know how much your ISA will be costing you before you invest
- Providers often let you hold cash in your account, ready to invest whenever you choose. You can even earn interest on that money so make sure your potential provider offers this if you think you may need this option
Which ISA is Right for You?
It entirely depends on your savings goal and the amount or risk you’re willing to take. It’s generally advised that if you have debts, don’t have any other form of savings or will need to withdraw your cash in an emergency then you don’t choose to invest as your capital is at risk. It’s also difficult to withdraw your money quickly, even transferring can take 30 days or more.
If you do have some spare income, however, investing is a good way to see high returns on your money, as long as you are aware of the risks.
As another option, with certain types of Cash ISAs, you have instant access to your money, which makes it a flexible way to plan your finances. Alternatively, fixed rate ISAs are a good way to see guaranteed returns on your capital, if you can tie up your money for a year or more.
The Impact of Inflation
It’s becoming increasingly important to look for an ISA that pays interest above the rate of inflation. Inflation proofing your savings has never been so important; inflation is rising rapidly and the rate of interest is falling.
While it’s not something a lot of people consider, you could effectively be losing money year to year if you’re not making any profit on your savings, the monetary value of your savings will inevitably decrease over time. If your savings are currently languishing in an account that is paying little interest then you are in fact losing money.
Even with a relatively low inflation rate, the buying power of your cash savings will be significantly reduced over 10 or more years.
To lessen this effect, savers should make sure their money is invested in in the best-paying account possible. Use our comparison charts for latest rates.
Transferring your ISA
It’s relatively easy to transfer your Cash ISA in to a Stocks and Shares ISA or vice versa. Changing ISA providers can take around 30 days if it involves a Stocks and Shares ISA or around 7 days if you’re simply switching Cash ISA providers.
The process simply involves filling in a form but be careful of penalty charges from your current provider which could apply.
Check latest interest rates on ISAs on our comparison tables, for more information.