Why you should use your ISA allowance

Not fussed about using your ISA allowance? Here's why you should think again.

We’ve come to the end of another tax year and as per, this is your last day to use your ISA allowance.

Banks and building societies are usually clambering over each other to convince you to sign up to an ISA around this time, but it just seems like they haven’t bothered this year.

In a continuing annual trend, Moneyfacts has dubbed this ‘the worst ISA season ever’ with record low rates.

Since January, it recorded 151 rate changes for ISAs—136 were rate cuts and a mere 15 were rate rises.

Coupled with a dropping number of available deals, this has resulted in the average ISA paying out just 1.29%, a fall from 1.45% a year ago and 2.39% five years ago.

Five years ago	Two years ago	One year ago	Six months ago	Today
Number of ISAs	286	213	220	233	211
Average ISA rate (fixed + variable)	2.39%	1.62%	1.45%	1.50%	1.29%
Average easy access ISA rate	1.51%	1.24%	1.11%	1.12%	1.04%

Source: Moneyfacts

All of this begs the question: is it actually worth bothering with an ISA this year?

The arguments for having an ISA

It may be hard to believe but there are a few good reasons to open an ISA.

First off, it’s a lifetime investment so once you’ve used it, you’ve got it for the long haul. They can come in handy when you're buying a house, planning a wedding, setting off on a round-the-world trip or, as they're not limited by age restrictions, topping up your pension pot.

ISAs are about to become more flexible too, so it could act as short-term cash relief. From 6 April 2016, savers can withdraw funds from their Cash ISA without losing their tax-free benefit on the condition that they replace it by the end of the tax year .

The other important thing about an ISA is it’s a ‘use it or lose it’ deal. If you don’t use this tax-free allowance – which is a maximum of £15,240 this year – it’s gone forever.

Yes, rates are pitiful right now but they won’t always be, and you can move your money in years to come.

If you’re a taxpayer then rates on the likes of current accounts might look more tempting, but they are subject to tax, so you need to factor that in before you make a decision.

Here are the top fixed and variable rates right now:

Account	Type	Interest Rate (AER)	Minimum deposit	Notes
Coventry BS Easy Access ISA (2)	Instant access	1.40%	£1	New subscriptions only.
Al Rayan Bank Notice Cash ISA	Notice ISA	2.02%*	£250	Transfers and new subscriptions. 120 days’ notice required for withdrawals.
Al Rayan Bank 12 Month Fixed Term Cash ISA	One-year fixed rate	1.90%*	£1,000	Transfers and new subscriptions.
Bank of Cyprus UK Fixed Rate Cash ISA	Two-year fixed rate	1.65%	£500	Transfers and new subscriptions.
Bank of Cyprus UK Fixed Rate Cash ISA	Three-year fixed rate	1.75%	£500	Transfers and new subscriptions.
UBL 5 Year Fixed Rate Cash ISA	Five-year fixed rate	2.33%	£2.000	Transfers and new subscriptions.

*Expected profit rate

Compare even more top Cash ISA deals with loveMONEY

The arguments against having an ISA

If you have any sort of debt, outside of a mortgage, to pay off, then you should be paying that before thinking about an ISA. The interest rate on your debt will almost certainly far outweigh what you’ll earn from any savings.

There is an argument for non-taxpayers to stick to the likes of current accounts, particularly if you don’t have a lot of savings and you need some income now.

For example, Nationwide’s FlexDirect Account pays 5% on balances up to £2,500 for a year while TSB will give you the same 5% on balances up to £2,000 if you sign up to the Classic Plus Account- but it's not a teaser rate. The Club Lloyds Current Account pays 4% on up to £5,000 and Santander’s 123 Current Account pays 3% on balances between £3,000 and £20,000 permanently, although there’s a £5 monthly fee for the account. You can make that back though by earning cashback on your direct debit payments from the account.

Bag 5% on your current account

The other type of ISA

There are of course Stocks and Shares ISAs, if you’re willing to take on more risk for a higher return. Most companies will offer a range of options depending on your attitude to risk.

Many people would argue that if you’re thinking about an ISA as a longer-term investment, you should only be thinking about stocks and shares, as they historically beat cash.

For a cheaper, simpler investment you could go for an index tracker, which does exactly what the name suggests and tracks the performance of a stock market index. When the index rises, you make money, and vice versa.

Or you can choose greater risk and higher charges but potentially greater rewards by choosing to invest in a managed fund or picking your own investments in what's known as a self-select ISA.

Make sure you do your research and seek independent financial advice if necessary. In the meantime, you can get more information by reading our Beginner’s guide to Stocks and Shares ISAs.

Those who are feeling a bit more confident can get started at the loveMONEY investment centre today.

Everything you need to know about ISAs:

Fed up with miserly Cash ISA rates? Read our simple guide to Stocks & Shares ISAs

Use it or lose it- the best Cash ISAs

The ultimate guide to ISAs

Lifetime ISA vs pension: which is better?

The Lifetime ISA explained