Do you know your ISA from your elbow?

The last few years have not been easy for anyone when it comes to keeping finances in check, and staying on top of the latest products and information available is an essential part of keeping hold of the purse strings. 

Following the failure of several large high street banks, the credit crunch, recession and all that comes with it, the UK and other developed economies around the world have seen one of the longest financial depressions in history. 

In order to ease pressure on the economy, the Bank of England Monetary Policy Committee has taken a number of steps- including reducing interest rates to 0.5%. When the rate was dropped to 0.5% in March 2009, borrowers rejoiced. For savers, however, it has been a different story. 

Maximising the potential of your savings has never been as important as now, when rates remain at this historic low. Knowing the difference between different types of savings accounts is essential to make the most of what you're able to put aside. One of the most beneficial products to savers is the ISA. Available as both cash and stock and shares, ISAs grant the account holder a tax-free savings allowance, meaning your returns are protected. A basic-rate taxpayer usually has to pay out 20% of their investment income, with this rising for those on higher incomes. By using these special savings accounts, you effectively increase the real-term interest rate available. 

The total ISA allowance is £11,280 annually. This is split between a maximum cash ISA investment of up to £5,640. If you invest in shares, you can either include £11,280 annually, or split the allowance between shares and cash. Cash ISA rates vary from provider to provider and between type of account, just as with other savings accounts. There is easy access ISAs, fixed rate or variable. Currently, the top rates available are around 3.35% for easy access or 4% for fixed rate. As with any financial product, you must pick the one that is right for you. While there are no signs that the economic difficulties are soon to abate, saving smart is the first step to protecting your finances in worst-case scenarios. 

This article is written on behalf of Principality Building Society.

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