Alternatives to cash ISAs
Deciding what to do with your money to maximise returns can be tricky especially when interest rates are at an all-time low.
Some of you may want to play it safe and lock your money in a cash ISA which will guarantee a tax-free return on your money. However, with the Base Rate at 0.5% you may find investing your money elsewhere more financially rewarding.
Before you lock your money away have you thought of what else you could do with your tax-free Cash ISA allowance of £5,340?
Perhaps you could make an extra payment on your home mortgage or decrease your credit card debt.
When it comes to investing for the future, there are plenty of options you can explore, below are just a few examples.
Pensions
Investing in a pension fund is even more tax efficient than a cash ISA, and you have the potential to benefit from a wide range of options to suit your needs.
Did you know that if you are on a higher tax rate of 40%, you can get 40% tax relief on your pension contributions? Basically, with every £100 contribution you make, it will only cost you £60. However, this relief is only available to the amount of your income that is taxable at 40%. The balance of any contribution will still get tax relief but at the lower basic rate of 28%.
If you are a basic rate taxpayer you can benefit from pension contributions as well. Basic rate taxpayers get 28% tax relief on contributions.
Additionally, when you take your benefits at retirement you are able to withdraw up 25% of your pension as a tax-free lump sum.
Pensions are also exempt from capital gains tax, investment income tax and are very efficient Inheritance Tax planning vehicles.
With ISA season already upon us, time is running out to use this year’s tax-free savings allowance. But just how much do you know about ISAs?
Invest your £5,340 stocks and shares
One good investment that has stood the test of time is the stock market. Investing in the market over the long term has proved one of the most effective inflation-busting investment opportunities in recent times.
With analysts predicting the FTSE could rise by 8% in 2011, investing in a stocks and shares ISA can net you a healthy return.
Buying stocks and shares involves much more risk to your capital compared to cash ISAs but as long as you are in it for the long term it could be a much more exciting ride.
Invest in a tracker fund and follow its progress with daily updates and you will gain access to leading blue chip companies.
Remember past performance does not guarantee future profits. The value of your investment and any income from it may fall as well as rise and you might not get back your original investment.
Extra mortgage payment
Did you know that making extra mortgage payments could significantly reduce your mortgage term?
Interest rates are low at the moment which means people on trackers or standard variable rates are paying the lowest mortgage rates in decades.
The real expense that lies with a mortgage is the interest you will be paying. So, if you use your ISA allowance to overpay your home loan you will get your debt cleared much faster and significantly reduce the interest you will pay over the term.
Most lenders will allow you to overpay a certain amount, normally a fixed percentage of the outstanding debt. Many lenders will allow you to overpay up to 10% per year.
Research from Barclays found 10% of British homeowners are currently overpaying their mortgage. With an overpayment of £200 per month on an average 25 year mortgage you could see your mortgage term reduced by seven years and three months.
Credit card payments
Defaqto states that the average credit card interest rate is now 18.4% up from 17.7% in 2009.
Obviously, the longer you have outstanding debt, the more interest you will be paying.
If you take advantage of your savings and use it to pay off your existing debt or a portion of it, you will decrease the amount of interest you will be paying over the length of the debt.
The market-leading cash ISAs at the moment pay just over 3% for one year. The interest you will be paying on your credit card debt is far more than what you would receive for locking your money away for 12 months.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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