Escape inflation and tax with an Isa

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Escape inflation and tax with an Isa

Individual Savings Accounts (Isa) can provide a secure way of getting the most out of savings and investments.

With a guaranteed return, they can pay back higher levels of interest than those accumulated through regular savings accounts, something savers may be keen to take advantage of in the current economic climate.

As inflation rates fluctuate, the level of return paid out by standard accounts can be affected, so Isas which give a fixed rate of interest provide an attractive way of avoiding any potential financial pitfalls, as well as avoiding tax.

This month, inflation increased for the first time since February, meaning that the interest on some accounts will not go as far as it once did. Therefore, it is advisable to be sure that saving accounts are doing more than just providing a separate place for holding cash.

Recent research by Moneynet.com found that only one in five traditional savings accounts gave good returns to savers, with the rest paying rates of just 1.875 per cent or less, the minimum sum the website estimates savers need to sustain any real profit.

For higher-rate tax payers, the 2.5 per cent return the site believes is needed is only found on ten per cent of savings accounts available.

Tying cash for a fixed term into an Isa, however, can bring the necessary returns, as well as escaping taxation.

Introduced in 1999 to replace Peps and Tessas, Isas offer customers two options for an investor's cash.

Currently, with an overall annual investment limit of £7,200, savers have the option of either saving a maximum of £3,600 in a cash Isa, or placing the full amount into a shares version of the product.

Limits on how much can be invested are currently being modified, with the maximum yearly payment for the over-50s now standing at £10,200, of which £5,100 can go into a cash Isa. On April 6th 2010, this new upper limit will come in to force for all investors.

Using Isas to protect your cash for a rainy day can give good returns and help to keep the taxman at bay. Investors who pay basic-rate tax normally have to pay 20 per cent of their interest, while those in the upper rate have to give up 40 per cent of their interest.

For individuals over the age of 50, escaping tax can mean a real boost to their money. Fidelity International recently estimated that investors over 50 years old who take advantage of the raised bracket and put the maximum sum in a corporate bond fund with a five per cent interest rate each year could amass £231,106 by their 65th birthday. Their investment return of £78,106 would not be taxed.

Meanwhile, Barclays Wealth recently reported an increase in Isa investors from this age group following the introduction of the new rules.

Taxpayers with a dividend income on basic-rate payments pay ten per cent, in or out of an Isa, taken as a tax credit before receiving the dividend and cannot be refunded for investments in the Isa. Those in the higher bracket, who pay 32.5 per cent, only have to pay ten per cent for their Isa savings.

Products on the market come in fixed terms for savings, normally between one and five years. Currently, these include an M&S fixed-rate account with up to four per cent AER/tax-free for three years. With a two-year commitment, AA investors can receive 4.35 per cent on top of their savings.

As the effects of the recession continue to be felt, why not put your cash into an Isa and see what it can do for you? ADNFCR-323-ID-19471962-ADNFCR

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