What is the difference between an ISA and savings account?
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I am trying to save £1,000 by the middle of next year.
dannymarsh
1 year ago
Expert Financial Adviser Answer
Dr David Carter FPFS
answered 1 year ago
Effectively none - other than tax! A cash ISA is simply a savings account which is not taxed. The interest is paid to you in full, so they are slightly better for you if you are a taxpayer. If you are a non-taxpayer then there is no difference - you can arrange with the bank to have your interest paid free of tax anyway. The other main difference for you is that there is a maximum contribution you can make into an ISA each tax year, which runs from April 6 to April 5 the next year: £5100 this year, so you are well within that figure.
You will notice that I have talked about cash ISAs. The other kind is a stocks and shares ISA, which can hold investment funds (stocks and shares) - but investments such as those are not suitable for your short savings timescale. Just to complete the picture, though you can invest a maximum of £10,200 into a stocks and shares ISA, as long as your total investment into all kinds of ISAs this year (ie including what you have in a cash ISA) is no more than £10,200.
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You will notice that I have talked about cash ISAs. The other kind is a stocks and shares ISA, which can hold investment funds (stocks and shares) - but investments such as those are not suitable for your short savings timescale. Just to complete the picture, though you can invest a maximum of £10,200 into a stocks and shares ISA, as long as your total investment into all kinds of ISAs this year (ie including what you have in a cash ISA) is no more than £10,200.
Expert Financial Adviser Answer
John Stirling
answered 1 year ago
I would add that from a marketing perspective some ISA providers (and like Dr Carter I am assuming a cash ISA here given your objectives) will pay a slightly higher interest rate on their ISA accounts compared to their 'unwrapped' savings accounts.
However I am afraid that even if you put the full £1,000 in now then at best you might have £15 interest by the middle of next year, paying in regularly and evenly between now and then will roughly halve that amount (as only one payment will be in for the full period, and one payment for almost no time at all, and most somewhere in between).
So whilst tax efficiency, and choice of interest rate accounts is normally very important, in this case I'd suggest an account that it is easy for you to make payments to, and you are comfortable with, as that will likely be more valuable than the perhaps £0.50 pm loss of interest from not picking the absolute BEST account.
Of course if you find you can save more, or for longer then these issues become very important.
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However I am afraid that even if you put the full £1,000 in now then at best you might have £15 interest by the middle of next year, paying in regularly and evenly between now and then will roughly halve that amount (as only one payment will be in for the full period, and one payment for almost no time at all, and most somewhere in between).
So whilst tax efficiency, and choice of interest rate accounts is normally very important, in this case I'd suggest an account that it is easy for you to make payments to, and you are comfortable with, as that will likely be more valuable than the perhaps £0.50 pm loss of interest from not picking the absolute BEST account.
Of course if you find you can save more, or for longer then these issues become very important.
Expert Financial Adviser Answer
Darren Smith
answered 1 year ago
To add to John's comments you will often find that the "best buy" regular savings accounts will often require that you save for 12 months without any withdrawals or missed payments otherwise you wont get the published headline rate.
do read the terms and conditions carefully as John suggests as sometimes the lower headline rate will be better if you are 100% going to get paid rather than an eye catching 8% requiring £100pm for 12 months no withdrawals or missed months etc
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do read the terms and conditions carefully as John suggests as sometimes the lower headline rate will be better if you are 100% going to get paid rather than an eye catching 8% requiring £100pm for 12 months no withdrawals or missed months etc
