Older savers put a higher premium on safety than younger people, new research from the Financial Services Compensation Scheme (FSCS) shows. 40% of those aged 65 and over say being covered by an official compensation scheme is more important than getting the best possible Isa rate.
Isa safety check
The Financial Services Compensation Scheme covers savings of up to £85,000 per person, per financial institution. Investments are covered up to £50,000 per person per institution. This basic safety net covers most Isa providers in the UK, so the need for Isa security shouldn’t deter savers from shopping around for the best deal.
To be sure of maximum FSCS cover, it is important to understand how the scheme works and avoid saving too much money with a single financial institution.
However, this isn’t as simple as it might sound, because some banking brands which seemingly have no connection are actually linked for the purposes of the FSCS. Read our savings protection guide to find out more about this.
Variable Isa rates
In addition to knowing how your money would be protected in the event your Isa provider went bust, it’s crucial to check the rate you are earning on Isa deposits. The best instant access cash Isas currently pay just over 3%, tax-free.
The worst offer a meagre 0.1%, however, so it pays to shop around. If you have Isa savings from previous tax years, it’s important to check whether the rates payable on these accounts have dwindled. A new saving booster from Which? allows you to check your current Isa rate and see whether you could get a better deal elsewhere.
To get a higher tax-free savings rate, you’ll need to be prepared to lock your money away in a fixed-rate Isa account. The top 5-year fixed rate Isas currently pay 4.5% – but you should think carefully before giving up access to your money, and avoid doing so if there is a strong chance you’ll need to withdraw your cash during the term of any fixed account you sign up for.
Isa limits for 2011-12
The most you can put into a cash Isa during the current tax year (2010-11) is £5,100. You can invest a further £5,100 in a stocks and shares Isa, or put your whole £10,200 annual Isa limit into stocks and shares.
In April 2011, the new financial year begins and you’ll get a new Isa allowance. For 2011-12 this is £10,680, of which £5,340 can be deposited in a cash Isa.
Other tax-free saving
If you use your full Isa allowance, it should soon be possible to get an index-linked return on a savings account from NS&I.
This will have the added advantage of being 100% backed by the Treasury – thus offering watertight savings security. The index-linked savings certificates are not yet on offer, but are expected to return soon.
If you are paying tax on your savings interest, it is even more important to get a good rate. With inflation currently running at 4.4% (CPI) and a retail prices index (RPI) high of 5.5%, the danger of settling for second best is that the value of your money will be eroded over time.
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