The clock is ticking to keep your savings from the taxman

 
Philip Salter
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IF YOU are in the 20 per cent of Londoners who, according to research from Fidelity, put off getting their individual savings account (Isa) to the last week of the financial year, now is the time to shelter your savings from taxation. You will have to act quickly to pick up the best deals. Of equal importance, you should move money out of your old Isas, where they are probably earning close to nothing. The work doesn’t stop there – from 6 April, new Isas will be launched. So if you have any additional money in low paying savings accounts, rather than waiting another year you would be better off opening your 2011/12 Isa early.

Alana Fitzpatrick of MoneySavingExpert.com advises that “at this stage it’s very unlikely anything better will be launched; the best buys are already beginning to close, so the sooner you apply the better.” Stay away from one year fixed rate Isas though, as they offer lower returns than variable rate Isas. There are some longer term fixed rate Isas that offer slightly higher returns, but assuming the base rate is finally raised, these returns will probably be trumped by other options.

The best cash Isa currently on offer is the Santander Flexible Isa, which offers 3.3 per cent over the year. As well as offering the highest return it “guarantees to be 2.8 per cent above the base rate (currently 0.5 per cent) for a year, so if the base rate does rise, savers in this Isa would benefit,” says Julie Smith of Fair Investment Company. Be warned though, Santander is pulling its online offer today. “Branch and phone applications can still be made until closing time on 5 April, though go sooner rather than later,” suggests Fitzpatrick. The second best cash Isa is the Barclays Golden Isa. It “pays 3.25 per cent AER and also tracks the base rate until March 2012. New customers can only apply in branches until closing time on 5 April,” says Fitzpatrick.

If you do opt for the Santander Flexible Isa, after a year your interest rate will plummet to the base rate, as 2.8 per cent is made up in a one-year bonus. As such, you should remember to transfer your funds – most people won’t. According to research undertaken by Consumer Focus “more than a third of savers who hold a cash Isa have had it for more than five years.” As such, the average interest rate for cash Isas is an astonishingly low 0.43 per cent. If you already have any cash Isas you should find out how much interest you are receiving. Not all new accounts will accept transfers. The highest paying account that you are able to transfer into this year, the Nationwide e-Isa, offers 3.10 per cent. Do check for any transfer charges on your existing accounts prior to making the move, though.

Assuming you make the deadline, this is not the time to relax. In fact, rather than putting it off for another year, “savers should invest in an Isa as early in the tax year as possible,” says Danny Cox of Hargreaves Lansdown. “A higher rate taxpayer who waits to secure an Isa deal at 3.4 per cent would have been receiving 2.04 per cent in an equivalent rate taxable account. Why hang on for less than 0.5 per cent when 40 per cent tax saving on a 3 per cent Isa is the equivalent of 1.2 per cent,” says Cox. If you plan to use your Isa umbrella for cash in the financial year 2011/12, you should put the full £5,340 – the allowance rises in line with September’s RPI inflation figure – into the account straight away, if you can. Kevin Mountford of moneysupermarket.com expects to see some interesting Isa rates on offer. Fitzpatrick says “it’s definitely worthwhile filling up your new Isa as soon after 6 April as you can. Why wait a year when you could be earning tax free interest?”

Cash isn’t the only option for your Isa umbrella. Even if you use your full £5,100 cash allowance this year, you still have a further £5,100 for a shares Isa. Alternatively you could put the whole £10,200 into a shares Isa. Next year you will be able to put £5,340 into a cash Isa, or up to £10,680 into a shares Isa. Catherine Penney of Barclays Stockbrokers says that a shares Isa could prove a better option, “provided that an individual is prepared to accept that their capital is at risk and that they may get back less than they invested,” as “there is the potential to achieve greater returns over the long term.” Despite the possible volatility in the short term, “in an environment where interest rates are lower than the inflation rate, savings are being eroded in real terms. Anyone looking to use a cash Isa for the medium to long term should consider the impact this will have on the spending power of their savings,” says Penney.

Whether or not you decide to opt in the long term for a cash or shares Isa, or a combination of both, in the short term most people would be better off opting for the Santander Flexible Isa for this year, while moving their existing Isas into the Nationwide e-Isa. If you don’t, the government is about to take a bite out of your savings, especially if you are earning a paltry 0.43 per cent on your old cash Isas. Stop a moment to think about what inflation at 5.5 per cent RPI is doing to your wealth. Then act.