When it comes to savings there’s such a wide range of options to choose from that making sure you get the right account for you can seem rather daunting. However, of the two main types of saving accounts on offer – an ISA or a regular savings account – there are different benefits attached to each one, as well as different disadvantages. Below, we take a look at some of the characteristics of each type of savings account, so that you can decide for yourself, which is the best to go for.
ISAs
The biggest advantage of opening an ISA is that this is a form of tax free savings i.e. the interest that you earn on the money that you save is not subject to tax. If you use up your ISA allowance during each tax year you will see substantial interest mounting up on those savings. There are also several different types of ISAs – the cash ISA and the stocks and shares ISA – which you can use for different purposes and to save separately.
Perhaps the biggest disadvantage of ISAs is that they are subject to limits – there are annual and overall limits to how much you can put into an ISA and you can’t simply keep channeling all your savings into one to enjoy the tax-free savings. For the tax year 2013-14, which ends on 5 April 2014, the limit is £11,520 and within this you can put up to £5,760 into a cash ISA and the rest into a stocks and shares ISA. The other disadvantage with an ISA is that there are age limits in order to open one – you need to be at least 16 years old to have a cash ISA and 18 for a stocks and shares ISA. Finally, you need to be a resident in the UK for tax purposes to benefit from an ISA – this is not a disadvantage for most but does provide a barrier to entry in some circumstances.
Savings accounts
If you choose a savings account over an ISA then there is usually no limit to the amount you can deposit per year, which means that you can save as much as you want under the favourable conditions you have found with the account provider. There are also savings accounts options available for all ages so it doesn’t matter how young you are – or even if you have children you want to get into good habits – a savings account is available from the year dot. Savings accounts come in all shapes and sizes, from high interest inaccessible accounts to low interest frequent use accounts – the versatility of the savings account is one of its major benefits, as there are more options than with an ISA.
In terms of disadvantages, by opting for a regular savings account you will need to pay tax on the interest that you earn on your savings – this will be payable at the same rate as you are liable for income tax at and is the principal down side of a savings account as compared to an ISA.
Whilst many people assume saving is a choice between ISAs and regular accounts, actually there is a lot to be said for combining the two. Use your tax-free savings allowance and the versatility of the savings account to get the most out of the money you save.