6 tips for getting the best ISA rates in 2019
Unlike typical savings accounts and investments, you don't pay tax on the returns gained through an Individual Savings Account (ISA). This means you’ll likely get the best tax-adjusted rates possible within that asset class.
But with so many products to choose from and interest rates constantly changing, taking advantage of the best ISA rates isn't always straightforward. In this guide, we'll give you six tips on maximising your ISA allowance in 2018/19 and beyond, so you can make your savings or investment work harder and choose products that suit your needs.
1.Choose the right type(s) of ISA
There are five main types of ISA available to adult UK residents. While all of them offer the potential for tax-free returns, not all of them offer the same in the way of returns.
- Cash ISAs work similarly to savings accounts, and have an interest rate that is fixed or variable. There may be an introductory rate that reverts to the standard rate after a set period.
- Stocks and Shares ISAs do not have interest rates. Instead, you earn tax-free capital gains, interest on bonds, or dividend income, in accordance with the performance of your investments.
- Lifetime ISAs work like Cash ISAs or Stocks and Shares ISAs depending on the product chosen, with the added benefit of a 25% contribution bonus from the government.
- Innovative Finance ISAs (IFISAs) offer a variable interest rate that's linked to the demand for P2P loans and the performance of the loans in your portfolio.
- Help to Buy ISAs are a type of Cash ISA, with the added benefit of a 25% bonus from the government when you come to buy your first home.
Each tax year (6th April–5th April), you can put anything up to your annual ISA allowance (£20,000 for the 2018/19 tax year) into one ISA, or spread it across a maximum of one of each type. Bear in mind that the Help to Buy ISA is classed as a type of Cash ISA, so you cannot pay into both simultaneously. There are also individual contributions limits on Help to Buy and Lifetime ISAs.
You can also pay into a Cash or Stocks and Shares Junior ISA on behalf of your child, but this does not affect your own ISA allowance.
While some ISA products may not offer high interest rates or even any interest rates at all, that does not mean they won't offer you the highest returns on your money. Read on and check out our guide to the different types of ISA for more advice and information.
2.Take some risk, where appropriate
As a rule of thumb: the more risk that's involved, the higher the potential returns.
Cash ISAs (including Cash Lifetime ISAs, Cash Junior ISAs, and Help to Buy ISAs) are savings products that do not put your capital at risk. In other words, you can not end up with less than you put in. Up to £85,000 per institution is also protected by the FSCS, meaning that you can recover anything up to this amount should your ISA provider go out of business.
The downside is that rates are generally very low. At the moment, they're even below the rate of inflation, which means your savings lose their spending power over time. Unless you take advantage of a fixed-rate deal, this interest rate can go up or down, usually in line with Bank of England rates.
Stocks and Share ISAs (including Stocks and Shares Junior ISAs, and Stocks and Shares Lifetime ISAs) put your capital at risk, because the performance of your investments can result in negative or positive growth. In other words, you can get back less than you put in. (If you have a Stocks and Shares Lifetime ISA, you will still benefit from a 25% bonus on contributions.)
The upside is that, historically, stocks have offered higher returns than cash over the long-term. According to data from Schroders, if you had put £1,000 in at the start of the 1999/2000 tax year, your balance at the end of 2016/17 would have been:
- £1,162 with the average Cash ISA (0.89% growth after inflation)
- £1,841 with the average Stocks and Shares ISA (3.66% growth after inflation)
Up to £50,000 per institution is covered by the FSCS in the event that your Stocks and Shares ISA provider goes bust – however this does not protect against poor investment performance.
IFISA rates are typically far higher than Cash ISA rates, because your money is lent to individuals or companies and your capital is at risk — we're currently projecting returns of 6.0% per annum over five years. These rates rely on borrowers paying their loans back, as well as demand for P2P loans, so there is a chance that they can rise or fall. However, most IFISA providers take measures to protect against bad debt - we have the Lending Works Shield (a combination of insurance, a reserve fund and diversification), and meticulously review the credit, fraud and affordability risk of borrowers to minimise risk.
It is important to remember that funds are not covered by the FSCS. That means you won't be able to recover any money should your provider enter default.
In summary, if you cannot afford to lose your money or don't want to take any risks, Cash ISAs are the safest option. However, rates are low and there's a chance your money will lose its spending power over time.
IFISAs are riskier because you're relying on the repayment of the P2P loans, and there's no FSCS cover should your provider go bust. However, the projected returns are relatively high, and some providers have reliable protections in place to mitigate risk.
Stocks and Shares ISAs can be risky because investments are volatile and unpredictable. While they have the potential to deliver very high returns, there's also a chance you could lose everything.
There are scores of ISA providers and hundreds of products to choose from — in March 2018, there were 446 Cash ISAs alone on the market, according to Defaqto. Comparison on MoneySuperMarket in July 2018 shows Easy Access Cash ISA rates ranging from 0.1% to 1.25%.
There's more than headline rates to take into consideration, with different products offering different benefits and conditions, but this shows the importance of shopping around to find the best ISA rates, whichever type you decide on.
Comparison websites are useful but not comprehensive, so remember that you might get a better deal by going direct. You might also consider taking the advice of a financial advisor.
4.Commit to a longer term
Generally, the longer you leave your money untouched, the higher returns you'll get. That's partly down to the power of compound interest, which sees you earn interest on interest already earned. Let's imagine you put £1,000 into an ISA that delivers 5% growth per annum:
- After one full tax year, your balance will have grown to £1,050 (£1,000 + 5%).
- In the second year, you'll earn 5% on the full balance, including last year's interest returns, giving you £1,102.50 (£1,050 + 5%). That means you've benefitted from 10.25% growth (£1,000 → £1,102.50) over two years.
- Over ten years, your original £1,000 would have grown to £1,628.89 — an increase of almost 63%.
When it comes to investing, long-term commitment is required to ride out short-term volatility. Financial advisors usually recommend investing for a minimum of five years, but ideally ten.
Cash ISA providers might offer you a higher rate if you commit to a longer term, rewarding you for keeping your money with them — just remember that the market might strengthen in the future, making your fixed rate look relatively poor.
In summary, if you can afford to, it usually pays to avoid ISA withdrawals and leave your money to grow. However, that doesn't necessarily mean sticking with the same product…
5.Don't be afraid to transfer
ISA rates tend to drop significantly after the first year, so it may be worth transferring old funds into a new account. The annual ISA allowance limits the amount you can save or invest in a particular tax year, but your total balance can exceed this amount if you consolidate savings or investments from the past.
For example, if you have £5,000 in a Cash ISA from 2017/18, you can transfer this into an IFISA and top up by another £20,000 in 2018/19, giving you a total of £25,000. You should earn interest or capital gains on the full balance, not just the amount contributed this year.
You'll just need to make sure that the new account accepts transfers, and watch out for exit fees from your old ISA. Make sure to transfer rather than withdraw and re-invest your funds, too, otherwise they will count towards this year's ISA allowance.
If you've already opened an ISA this tax year but have found a product you'd like to switch to, this is possible as long as you transfer your entire balance. So, it's well worth keeping an eye out for the best ISA rates even after you've contributed. See the government website for more information.
6.Take fees into account
Once fees and charges are taken into account, the product with the best ISA rate doesn't necessarily deliver the highest returns, so it's crucial to compare these figures.
Cash ISAs may charge you an exit or transfer fee, especially if you withdraw or move your funds within a fixed-term deal.
Stocks and Shares ISAs usually involve a variety of fees:
- a platform charge, either in the form of a flat fee or a percentage of your total holdings (which may be capped);
- a fund manager charge, which is a percentage of your fund; and
- fixed charges for buying and selling funds;
but you also need to look out for transfer fees, dividend reinvestment fees and more. Consider what type of investor you are to make the right decision: How much are you investing? Will you be an active trader? What types of fund will you invest in? Do you want to go with the cheapest platform, or are you willing to pay more for certain benefits?
IFISAs sometimes have management fees, but here at Lending Works we do not charge lenders any servicing fees. The only time you will be charged is if you take advantage of the Quick Withdraw facility by withdrawing money that is still on loan. Find out more about our rates and fees here.
Products that appear to have the best ISA rates don't always deliver the highest returns or suit your needs, so you've got look beyond the headline figures if you want to maximise your savings and investments. Take these six tips on board to make your money work harder in 2018 and beyond.
It is important that we highlight that with any peer-to-peer lending platform, your capital is at risk.