Developing the discipline of setting aside enough money each month to accumulate a healthy savings balance that can provide for lean times has been thrown back into the spotlight following the development of the UK's recent financial turmoil.
Prudence is the way forward, according to many and re-learning the art of saving is a discipline to be embraced. Indeed, many financial commentators have pointed out that the 'buy now, pay later' culture that has been prevalent over the past decade has resulted in the UK population exposing themselves to record levels of debt. Now that the days of easy credit have gone, many people will struggle to repay the debt balances they have accumulated.
However, despite the record levels of domestic debt many other UK citizens have been regularly saving over the past decade or so and more are now taking up the habit. One of the most tax-efficient ways of saving for the future is by depositing funds in an individual savings account (ISA). This type of account is exempt from the imposition of taxing the interest received and is valid for any UK taxpayer.
Known more commonly as a cash ISA, the maximum that can be paid into such an account each year is capped at £3600. However, all the interest earned is largely tax free. Like most accounts, ISAs offer higher interest rates for higher balances, but only if the money has already been accumulated in an individual savings account. You should note that the value of tax savings and your eligibility to invest in ISAs will depend on individual circumstances and tax rules, which may change in future, and the value of your investment may fluctuate and is therefore not guaranteed. This means that you may not get back the full amount of your investment.
However, as the saying goes; 'Mighty oaks from little acorns grow'. So, investing the maximum amount in an
individual savings account as a long-term savings strategy will produce a healthy capital balance in the future with the added benefit of years of compounded interest - all tax-free!
Such a savings balance provides peace of mind as a back-up for when times get hard, or just as equally can provide the cash for a major purchase at some time in the future. Or, if you are saving in such an account and urgently need access to cash, you can withdraw from instant cash ISA accounts without incurring any interest penalty. However, you cannot net off the withdrawal against your deposits. You will still only be able to invest the maximum amount of £3600, regardless of how much you have withdrawn.
However, just like other savings accounts the type of ISAs that pay higher interest are likely to be bonds or notice accounts, with typically 30 or 90 days' notice. These are ideal if you have no intention of withdrawing anything from the accounts, as you get the double benefit of tax-free savings and higher interest rates!
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This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.
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Adam Singleton writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.
