TSB Bank shares pros and cons of ISA types to help Britons ‘get most’ out of savings

The start of the new tax year is approaching fast, and many people will be looking to ensure they’re getting the most from their savings. With the Bank of England’s Base Rate currently at 4.50%, savers are enjoying some of the best returns on cash for more than a decade.

This also means that more savers risk exceeding their Personal Savings Allowance and having to pay on the interest they earn on their savings.

Basic-rate income taxpayers can earn up to £1,000 in interest, tax-free, per year, and higher-rate taxpayers can earn up to £500. Additional-rate taxpayers receive no exemption and are taxed on all interest earned outside of tax-free accounts.

These low thresholds, combined with higher dragged .However, cash ISAs can offer an efficient solution to this problem, a savings expert has said.

UK residents aged 18 and over can currently save up to £20,000 a year in an Individual Savings Account () without paying tax on the interest earned.

While this provides a valuable opportunity for savers to shield their interest from tax, it’s important to consider the impact of fluctuating .

Pete Hatton, head of savings at TSB, warned the current may not last. He said: “The Bank of England’s Base Rate has already fallen from its peak of 5.25%, and the financial markets are predicting further reductions this year.”

Therefore, he urged: “Choosing the right cash ISA for you means considering how to make the most of your cash savings if rates continue to fall.”

The flexible option – Instant Access ISA

An instant access cash ISA is great if your priority is flexibility and easy access to your savings.

However, Mr Hatton pointed out that this type of account usually has a variable , meaning it can move up or down, so you may get a lower return on your balance if rates fall.

The long term option – Fixed Rate

If you’re prepared to lock your money away, then a fixed-rate product is a good way to protect your savings when drop. This is because the is guaranteed for the term of the product.

Mr Hatton added: “Fixed-rate products also often offer a higher headline rate than instant access ISAs.”

Many banks offer a range of fixed-rate accounts with different terms and different .

To take advantage of this, Mr Hatton suggested splitting your savings and spreading them across multiple terms, such as a one-year and a two-year fixed-rate ISA.

Mr Hatton explained: “This approach can help during uncertain times, because the returns from the two-year product are protected if fall in the short-term, and the balance in the other account can be re-fixed after just one year, which is good if remain stable or even rise in the meantime.”

The best of both –  Limited Access accounts

Some banks offer limited access or defined access ISA accounts. These can be ideal when you want a better return than you’d get from an instant access account but with greater flexibility than a fixed-rate product.

For example, TSB offers the Save Well ISA, which offers a headline of 3.44/3.50% tax-free/AER (variable) in the calendar months you don’t make a withdrawal, or 0.49%/0.50% tax-free /AER (variable) in any month when you do make a withdrawal.

The smart money app Plum is leading the market with a similar offer. It provides an Annual Equivalent Rate (AER) of 5.05% with the condition that up to three withdrawals are made. However, the decreases to 2.5% if four or more withdrawals are made in one year.

The investment option –  Stocks and Shares ISA

A stocks and shares ISA is an ISA used for investment purposes and many financial services providers offer them.

If you’re over 18, you can choose to use some or all of your £20,000 Annual ISA Allowance to invest in a stocks and shares ISA.

Explaining the benefits, Mr Hatton said: “The returns from investments can be attractive, and the benefit of an ISA is that you don’t pay tax on any gains.”

However, he pointed out: “This approach is normally only appropriate for individuals who are prepared to put their money away for longer timescales – typically at least five to 10 years. And remember, the value of your investment can go down as well as up. Always make sure you do your research before investing and consider seeking financial advice.”

Lifetime ISAs and Junior ISAs

Another available ISA option is the Lifetime ISA, designed specifically for saving money towards a house or retirement.

This option is worth considering if you’re aged between 18 and 40 and planning for retirement or getting on the property ladder. People can contribute up to £4,000 each year, and the Government will add a 25% bonus of up to £1,000 each year.

However, this kind of account has , so it’s vital to understand the terms before investing.

If you have a child aged under 18 and living in the UK, you can open a Junior ISA or Junior Stocks and Shares ISA. Like other ISAs, the gains you make are tax-free. The maximum limit for a Junior ISA in the tax year is £9,000.

Mr Hatton said: “It’s a great way to save for your kids’ future, but remember, you can’t take money out of a Junior ISA until the child turns 18 – so this isn’t a good option if you think you might need access to the funds.”

Mr Hatton added: “Whichever you choose, as long as it’s in an ISA, all the interest you earn will remain free of tax.”