Don't give the taxman a slice of your cake
ONE of the most fascinating pastimes in the first days of a new year is to stroll around the supermarket and eavesdrop on some end-of-festive-season conversations (like "no more alcohol ever again" or "please not another turkey curry").
But in the world of personal finance, the most commonly-heard phrase is: "Time to think about this year's Isa allowance."
The thing about an Individual Savings Account (or Isa) is that it's like a cold - you've either got one, or you haven't.
However, unlike the cold, if you haven't got one, you might well want one. Here's why.
An Isa protects the interest on your savings from the greedy clutches of the taxman.
This means that, if your marginal rate for tax is 20 per cent, you will never lose 20 per cent of your interest, no matter how much interest you earn. (Although the first £1,000 of savings interest is always tax-free.)
TV money man Martin Lewis likes to describe the tax advantage of the Isa like a sheet of cling film you can wrap around a slice of cake. The cling film stops the taxman taking a bite of your cake – and thus protects your money and keeps it whole.
This is why, since it was launched in 1999, the Isa has been the pop icon of all the savings accounts in the UK. But unlike so many much-loved pop icons, the Isa didn't drop dead on us in the last 12 months.
Quite the contrary. HMRC says there are now over 13.8 million Isa account holders in the UK, who love the tax advantage, but also love how simple and easy to understand the Isa actually is.
There are different types. You can invest in cash using the Cash Isa, or in the stock markets using the Stocks & Shares Isa.
If you already have a Cash Isa, you can switch some or all of your accumulated cash ISA holdings into a Stocks & Shares Isa, as long as you understand the level of risk you are willing to take.
There's even a junior version for the little savers, the Junior Isa or Jisa, which can be a great focus where relations can lodge a few bob for the little one's future.
This tax year, until April 5, you can deposit up to £15,240 in an Isa. It could be very worthwhile using that allowance, because you can't carry forward any bits of your allowance you don't use up. As they say in Tesco: ‘When it's gone, it's gone!'
Next year, the 2017/2018 tax year starting on April 6, the limit will increase to a cool £20,000.
Now, admittedly the Bank of England base rate – which influences savings interest rates – is as flat out as a drunken New Year's Eve reveller at the moment, at an all-time record low of 0.25 per cent.
It spent over six years at the previous record low of 0.5 per cent, which was great news for home owners with variable rate mortgages, and financial sages including myself reckoned it could only go up from there.
But the Governor of the BoE, the ever-suave Mark Carney, threw a body swerve that would have done justice to George Best, and wrong-footed the lot of us. He decided, bless his little heart, to throw even more money into our pockets, and took it downwards, instead. Good news for mortgage holders is bad news for savers and savings interest rates, however.
Just about the best deals you'll get on a new easy access Isa this week are the NS&I's rate of 1.1 per cent or Virgin Money's 0.95 per cent.
It's like a Greek tragedy, where a gift from the Gods is often accompanied by a curse: we're allowed tax-advantaged growth, but have to endure interest rates that are rock bottom at the moment. (Don't say we don't give you culture in this column.)
Still, the principle applies. Savings rates are low everywhere, so you might as well ride out the storm in an Isa, where that cling film protection gives you interest growth that can be tax-free. There might not be much icing around at the moment, but you can still have your cake – and eat it!
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005