Stats from Halifax’s ISA report shows a striking correlation between age and average ISA savings. The average ISA balance stands at roughly £8,500.

The results show a remarkable contrast in the amounts that different age groups hold in their ISAs.

• Between 25 and 34, the average is just £3,100.
• Between 35-44, the average is c. £4,800.
• Between 55-66, c. £11,000
• Between 65-74, c. £12,500
• 75 and above, c. £14,100.

There is also, as one might expect, a division by region. The report suggests that average savings are much higher in the South of the UK than in the North.

It is not a perfect correlation, however. The proportion is skewed in favour of the older age brackets. Admirably, it demonstrates that, on average, pensioners still manage to retain solid savings levels despite high food and utility bills.

The low amounts recorded for young people can be explained by a number of factors: higher unemployment; the cost of living; the expense of travel; high demand for new and expensive technological products; and larger mortgages.

Nevertheless, the older generation clearly have a part to play in mentoring the young to make stronger commitments to saving.

It is important to note that standard cash ISAs are not necessarily the most competitive products on the market. Longer term bonds, especially those fixed to inflation, have a better chance of curbing losses made in real terms.

Which4Us savings tables can show you some of the best rates available on the market. Why not see if you can increase your savings with a better deal?

Keith McDonald
Editor, Which4U

The thing you need to ask yourself to start is ‘am I prepared to add an element of risk to my investment’. If the answer is yes, how far are you willing to go?

There are many levels of risks involved with different savings account types, from gambling the interest while keeping your savings pot in tact, to upping the potential returns along with the risk factor by investing in stocks and shares.

Fixed Rate Bonds offer higher interest rates than standard savings accounts in exchange for limiting access to your funds. The rate is usually fixed for a period of anything up to 5 years, allowing you to calculate the exact return on your investment.

The risk involved with bonds is that rates could increase during the life of the bond, but as the rate is fixed you will not be able to benefit from any rises. On the other hand rates could also fall, which would leave you on a higher rate that those offered on other similar accounts.

A step up from this is to invest your funds using a share dealing account. Many banks offer these accounts, which allow you to buy, sell and manage shares from a single account. This does of course come with a high amount of risk, but also ups the potential to make some attractive returns.

Whichever account you decide on, it is worth looking into using your annual Individual Savings Account (ISA) allowance. Any returns from an investment or indeed savings accounts must be declared as a form of income, so this means they are subjected to income tax. This can be up to 50% depending on your annual earnings, but there is a way of avoiding this tax.

ISAs allow you to save and invest up to £10,680 per year without declaring any returns from your pot, allowing you to build up a tax free haven. Half of this can be used for a cash ISA, while the rest can be invested; or up to the full amount into stocks & shares for those that prefer to invest.

ISAs can been incorporated into most account types, so whether you’re looking to open an instant access savings account, fixed rate bond or invest with stocks and shares, you can add the ISA wrapper and take 100% of the returns.

According to the government, the tax-free Junior ISA will allow parents to make contributions of up to £3,000 per year into these savings accounts – substantially higher than the recently scrapped Child Trust Fund which allowed just £1,200 of deposits per year.

In last year’s May Budget we leaned that Labour’s Child Trust Fund was to be axed, which soon became a highly controversial and high profile spending cut enforced by the coalition government.Under the previous scheme, all children born after September 2002 were eligible for the tax-free savings accounts scheme, which provided a £250 voucher to all newborns, to beinvested in a Child Trust Fund account and locked away until the child turned 18.

After the government announced that the scheme was to be axed from the start of 2011, voucher contributions were cut to just £50 per child, while previous plans to provide an additional payment when the child hit seven removed completely.

As expected, babies born from 1 January 2011 are no longer eligible for the vouchers, however parents can contribute up to £1,200 a year adding to a tax-free pot.

The Junior ISA will be available to all children aged under 18, including those that were born before the Child Trust Fund, however any children that already have a Child Trust Fund account cannot open a Junior ISA.

But this year brings some good news for the 20 million ISA savers in the UK, as the government has announced plans to increase the ISA limit.

As of 6 April, the amount savers can put away into ISAs to avoid paying tax on the interest will rise by £480 per year to £10,680.

In the Emergency Budget in June, the government had initially said that there would be a yearly increase to the ISA allowance, but there was a lot of speculation as to whether or not this promise would be kept.

However, the Treasury stayed true to its word, with plans to introduce the new limit of £10,680 for the 2011-12 tax year, up from the current limit of £10,200.

This means that savers can either put up to £5,340 into a cash ISA with the option of investing the remaining £5,340 into a stocks & shares ISA; invest up to the full amount into a stocks & shares ISA; or a combination of the two.

In October 2009, the ISA limit rose from £7,200 to £10,200 for all UK savers aged 50 and over, which became available for everyone else at the start of the current tax year.

Investment bonds can vary significantly, but the general rule around them is that in exchange for some kind of risk, they provide the potential to earn higher returns that those offered on standard savings accounts, as your investment is not generally tied to fixed interest rates, but on the success of the area you invest in.

There are different types of investment bonds, including:

* corporate bonds – issued by companies
* gilts – issued by the UK government
* bond funds – grouped investments investing in a range of bonds

Corporate bonds

Corporate bonds are often issued by companies as a method of raising capital that can be invested into their business. The amount invested, with interest added is returned to the investor on an agreed date.  Corporate bonds can be purchased and sold on the stock market and their value can increase or decrease.

Gilts (government bonds)

Gilts (or gilt-edged stocks) are bonds issued by the government paying investors a fixed interest rate. They are considered a safe bet, as it is highly unlikely that the government will go bust.

However, as gilts are also bought and sold on the stock market where their value can fluctuate.

Bond funds

Bond funds invest your money into several different bonds which can include corporate bonds and gilts, each offering a different interest rate and maturity dates.

All companies have different credit ratings and those with higher credit rating are considered safer  than those with a low credit rating, so the latter would have to offer higher rates in order to attract investors and compensate for the increased risk.

In June, the Investment Management Association (IMA) revealed that investment ISA net sales hit £247m, marking the highest quarterly ISA sales recorded in six years.

Investment ISAs allow you to use your ISA allowance as an investment to avoid having to pay any taxes on your earnings. In April 2010, the ISA allowance will increase to £10,200 (in October 2009 for anyone aged over 50), which means that you could invest this amount every year and receive 100% of your earnings. This technique has proven to be extremely successful for some investors, with many people earning over a million pounds simply through making good use of their ISA allowance.

For more information on investment ISAs and to see a detailed list of investment options, see our Investment Bonds page.

This means that you can boost your current annual £3,600 cash ISA savings to £5,100, and the same goes for your stocks & shares ISA allowance, but with this type of ISA you can invest up to your full ISA allowance, giving you the option to potentially invest £10,200 every year – either entirely into a stock & shares ISA, or a combination of the two.

This is great news, as it effectively means that you can invest a higher amount and receive 100% of the returns, without having to pass a penny on to the tax-man!

However, the new allowance will not be made available instantly. If you’re less than 50 years old, you will have to wait until the beginning of the new tax year (6 April), and even for those that are aged over 50, you will have to wait until 6 October before you become eligible to invest the increased amount.

According to http://newsbump.co.uk/ the allowance will see future increases to stay in line with inflation.

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By Sam Gooch

Weighing up your choices

Fixed Rate Bonds VS ISA’s

Knowing where to put your savings is confusing these days, especially based on how much stress the economy has been under over the last few months, pushing the Bank of England to make a string of cuts to its Base rate which have in turn been passed on to savers rates.

With Thursdays cut taking the Base rate down further to a new record low, rates on normal savings accounts have recently been slashed, which has limited our saving options, with saving suddenly becoming less attractive.

But there are still some good savings accounts out there, carrying slightly more risk to your returns than instant access accounts, but offering the best rates at present. The two types of savings accounts that stand out from the rest, are fixed term bonds and Individual Savings Accounts (ISA’s).

Although these savings accounts are similar in some respects, there are pros and cons to each that need to be evaluated before making a choice between the two.

Lets start with Fixed Rate Bonds.

The way that fixed rate bonds work is by providing a rate that is fixed throughout the duration of the agreed term, giving you a predictable source of income with no surprises.

Rates on these accounts can differ, with the higher rates generally paid on short-term bonds, and lower rates on longer-terms. This is because the shorter terms carry less risk to the banks, as significant rate changes would not have a lasting effect.

Fixed Term Bonds allow savers to make significant deposits, usually ranging between £500,000 and £2 million, but some, such as ICICI, come with no maximum limits, allowing savers to deposit as much as they like. Something that you must remember is that you can only make an initial deposit when opening the account, and no more throughout the duration of the bond.

There are no limits as to how many of these accounts you can open within any one year, so there is nothing stopping you from opening five separate accounts across different banks.

Some people will tell you that the success of your fixed term bonds involves luck, as the rate you sign in for will not be affected by the Bank of England Base rate, so if you choose to open your bond at the right time, you might find that your savings are earning far more interest that they would in a standard account. Knowing which direction the base rate is headed isn’t all about luck, you can often get an insight into predictions, and make an educated guess. But with all luck comes the flip-side – bad luck, so remember to do your homework as you could find that rates begin to rise and suddenly the rate on your bond is a lot less attractive.

If you think back to October last year, when the Base rate stood at 5%, you would be very chuffed with yourself if you had fixed in a rate as it peaked!

Many economists believe that rates will continue to fall during 2009, going as low as 0%.

You must remember that these accounts do exactly what they say on the tin, they fix the rate. Always make sure you are being realistic with your money, choose a term that is right for you and only go for this option if you can actually afford to lock your money away. In most cases, withdrawing early will close the bond and you will lose any interest you accumulated to date.

As with any normal savings account, the interest you earn counts as income, so is subject to tax deductions. For anyone on the lower tax band (under 34,800) the tax rate is 20%. For those earning above this rate must pay 40%. There are other circumstances in which non-earners may be given a tax free allowance, so check out the HM Revenue website for more information.

Next lets look at Individual Savings Accounts

Individual Savings Accounts (often abbreviated to ISA) offer a tax free option to saving. The difference with ISA’s and your average savings account is that you don’t have to pay any tax on the interest you earn.

Each year you’re given a £3,600 allowance that you can put into your ISA, and the interest accumulated from your total balance is tax free for life. You can still deposit up to £3,600 between now and April 2009, which is when your allowance is renewed, so if you decide an ISA sounds right for you, make sure you use up your allowance, as you cannot carry it over.

ISA’s offer a range of options to suit your needs, such as fixed rate, base rate guarantees and instant access.

Unlike fixed term bonds, most ISA’s will allow you to make as many deposits as you like, providing you keep to the £3,600 annual limit. To get the best returns on your ISA, you would be better to put the full £3,600 into your account as soon as your allowance renews, as this would allow you to earn the highest possible amount of interest. This will not suit everybodys savings plans, so you may be better to save as you earn, making monthly deposits from your salary.

As returns will often be high compared to some savings accounts due to tax redemption, interest rates offered on ISA’s tend to be lower than fixed term bonds.

Most ISA’s are affected when rate cuts are passed onto proviers, so you cannot guarantee your returns over time. If you were to open an ISA when rates were high, there would be no guarantee that they would stay high, and visa versa. Fixing your rate on an ISA would allow you to lock yourself in at a rate for a specified term. This does come with a certain amount of risk, as rates change, especially over a long period of time.

Both fixed term bonds and ISA’s are both great tools for saving as they encourage you to leave your money to grow. With an ISA, rather than capping interest earned to date and closing the account due to withdrawals, ISA’s simply give savers an annual deposit limit of £3,600, and once this has been reached, no more can be added, regardless of any withdrawals. This may not apply to all ISA’s so that’s something to check before applying.

Always make sure you’re aware of the compensation scheme used by your proposed provider. With the recent financial crisis, many financial institutions have been feeling the pinch, so although it may be unlikely that your bank would collapse, it should definitely be something that you look into. For more information which banks carry which schemes, and which banks fall under the same financial umbrella, see Which4U’s Top Ten Savings Tips.

The bottom line with any savings account is to always make sure you’re gaining the highest possible returns. Although ISA’s provide tax free interest, you could find that the difference in rates offered when comparing to fixed term bonds, will in fact leave you worse off. Before deciding, compare the savings market to give you an idea what’s available

One last thing to remember is to make sure your account is paying a higher interest rate that the rate of inflation, as anything below would cause your money to erode. This is because Inflation measures the rate at which prices will increase, so if this rate is higher than the interest rate you are earning, your money will be slowly eroding.