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Using the new £20,000 ISA rate limits

Inertia might be costing you dearly when it comes to savings and investments.

Since the deadline for investing in an Individual Savings Account (ISA) does not come around until the 5th of April 2018, many people may hold off making any use of their annual allowance until close to the deadline.

As a recent report in the Mirror newspaper points out, however, those who have consistently left it until almost the last minute may have lost thousands of pounds in the interest that even a medium-risk ISA portfolio might return.

The article cites the following example:

• investing £6,000 in a medium risk ISA portfolio at the start of the tax year rather than at the end, for each of the last ten years, could have generated an extra £3,772 in investment returns.

The lesson is clear - the sooner you start making use of this vehicle for your savings and investment, the greater the potential rewards.

And this year – from the 6th of April until the 5th of April 2018 – the maximum you may save or invest in an ISA stands at an all-time high of £20,000, so the potential for maximising your returns is higher than ever.

How ISAs work

An Individual Savings Account works in a very simple way – it is a tax-free savings account. Returns on any ISA may vary according to the type you choose and the rate of interest they return, but whatever that return, you pay no tax on it.

There is an upper ceiling (currently £20,000) on the maximum amount you may invest in an ISA and that allowance runs until the end of the year (next April), when a new allowance is typically announced, and you need to start investing in new ISAs – the annual allowance cannot be rolled over into the next year.

Not only is an ISA tax-free, it also offers a very flexible and versatile way of saving, since your £20,000 allowance may be invested in a number of different types of ISA, all included within any one year’s “wrapper”.

The Money Saving Expert website explains how each of the five types of ISA work:

1. Cash ISAs

• these are just like regular savings accounts in that they may be instant access, regular savings or fixed rate ISA’s – the only difference being that there is no tax to pay;

2. Lifetime ISAs (LISAs)

• these were introduced this year and allow you to save up to £4,000 every year until you reach the age of 50;

• in addition to the interest earned on the LISA account, the government adds a 25% bonus at the end of every year – so that if you invested the full £4,000, for example, the value of your ISA immediately jumps to £5,000 at the end of the year, plus whatever interest it has earned;

3. Help to Buy ISAs

• these are for first time buyers, who may open the account with an initial deposit of up to £1,200, followed by regular deposits of £200 month thereafter;

• when you are ready to buy your house with the help of your ISA savings, the government adds a bonus of 25% on top of the current value of your savings – and you have also enjoyed the interest from your ISA;

4. Innovative Finance ISAs

• if you are prepared to risk your savings by lending to businesses, property, through crowdfunding or peer-to-peer lending, any interest you earn from those loans is tax free if you use an Innovative Finance ISA;

5. Stocks and Shares ISAs

• just as the name suggests, your money in this type of ISA is applied to investments in stocks and shares – with your ISA typically managed (for a fee) by an online broker or platform.

Subject to the particular rules about the maximum amount you may invest in each type, you may choose a mixture of different ISAs across which to use your current annual allowance of £20,000 in tax-free savings and investments.

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