Saving your money: NISA or interest-paying current account?
Investing your spare cash in a savings account is, of course, a sensible course of action to help you enjoy a financially stable future or to generate a little extra money to spend on some occasional luxuries. But with interest rates at record lows, it can be difficult to find a savings account that will yield even a moderate amount of interest, especially if you have limited funds to invest.
If you prefer to invest your savings on the high street in an account from which you can easily withdraw your money, you could consider an NISA or an interest-paying current account.
Saving in an NISA
NISAs (the new version of the popular ISA) offer the opportunity to save your money where the taxman can’t reach it, allowing you to invest up to £15,240 each year tax-free. You can choose between a cash NISA and a stocks and shares account – the latter offering the potential to generate far higher returns for a little more risk (in other words, what you make in interest will be subject to the performance of the stock market). You can also have one of each type of NISA, but your overall savings mustn’t exceed the tax-free allowance.
Some NISAs offer a fixed rate of interest, so you’ll know how much extra cash you will receive, but restrictions might dictate how often you can withdraw money from the account. If you prefer to retain control of your money, a variable rate NISA might suit your needs, but the interest rate might fluctuate. Also, remember that once you have withdrawn cash from your NISA, that portion of your tax-free allowance is used up and can’t be replaced until the new financial year.
Saving in an interest-paying current account
Some savers are using interest-paying current accounts to enjoy higher returns, especially as new rules mean that, from April 2016, the first £1,000 of savings will no longer be taxed. Any savings over £1,000 that are held in an account that is liable for tax will be taxed at the standard rate of 20p per pound. The tax-free amount for higher rate taxpayers will be £500.
Some interest-paying current accounts are offering interest rates of up to 5%, far outstripping the rates offered by most cash NISAs. However, your savings are effectively held with your disposable cash, meaning that discipline is needed to ensure you don’t inadvertently dip into your savings for everyday spending.
You can also combine your savings with a partner if the account is held in joint names, which will enable you to maximise your interest and make the most of your tax-free allowance under the new rules from April 2016. Some accounts also offer lucrative offers, such as discount vouchers and travel insurance.
As ever, when making any sort of financial decision, obtaining independent advice from a qualified professional is a sensible way to make an informed choice about how best to save for the future.