The rules on tax-free saving have changed – but although there is now another acronym on the market, things have actually got simpler.
The government recently launched “new individual savings accounts”, or Nisas, to replace Isas. But they don’t just sound it – they really are nicer.
Isas were introduced just before the turn of the century in the wake of Peps and Tessas. People could save in a cash Isa and/or a shares Isa, with all the interest being paid free of tax.
But there were strict limits on how you split your cash and your shares, and although you were allowed to convert your cash Isa into a shares Isa, you couldn’t do it the other way round.
Things are much simpler with Nisas. You can now save up to a total of £15,000 a year in either cash or shares, or in a combination of both.
Even for savers who are wary of the stock market but who think that low interest rates mean it is pointless saving cash, Nisas can prove useful. Anything you stash away now will enjoy tax-free growth when interest rates eventually start to rise. But you can’t carry your allowance over into future years, so what you don’t save this tax year can’t be invested at a later date instead.
Charlotte Nelson, of Moneyfacts.co.uk, said: “As an Isa shelters your returns from tax, it should always be your first port of call when you are looking to start a nest egg, regardless of what tax band you are in or the interest that is paid.
“With few savings accounts currently beating inflation, cash Isas offer the best possible home for savers to be able to negate the effects of inflation.”
The best deals are often to be found with fixed-rate accounts. In return for slightly higher interest rates, however, you will be asked to tie up your money for a specific period – usually anything between one and five years. But be warned: if you lock your money away at a fixed rate for five years and interest rates start to go up during that time, you won’t be able to move your money until the five years is up.
“Savers who opt for these rates must ensure they have enough investments elsewhere to cover life’s emergencies,” said Ms Nelson.
Research by Moneysupermarket.com ahead of the launch of Nisas found that many people were confused about the new, simplified accounts.
Kevin Mountford, head of banking at Moneysupermarket.com, said: “I am surprised that so many people are unaware of the introduction of Nisas.
“Similarly, there is also a clear lack of understanding among many as to the rules and benefits of saving into a Nisa. It is brilliant news for savers; not only will they be able to switch stocks and shares into cash, a move that wasn’t possible before July, but the annual limit will rise to £15,000.
“This is almost three times as much as the previous cash Isa limit and almost a third more than the previous stocks and shares limit.
“However, with so many people unaware of these rules, more needs to be done to ensure that people will actually reap the rewards.”
Mr Mountford added that the importance of shopping around for the best deal was as important as ever, with extra interest of up to £240 a year to be had from switching from the market average cash Isa to the best rate.
“The current rates on offer are stagnant and uncompetitive,” he said.
“Savers must be prepared to shop around for the best deals and switch if they can make more money elsewhere, especially as many banks are not proactive in helping you with this.
“By doing nothing you are simply playing into the hands of providers so it is important to look around and challenge the banks.”