Whether you're saving for the holiday of a lifetime or a retirement that's still decades off, Individual Savings Accounts (Isas) are an ideal place to build up a nest egg.
You can save up to £20,000 each financial year, split across as many Isas as you like, without having to pay a penny to the taxman.
With this tax year ending on April 5, savers are understandably rushing to use the allowance while they can.
Recent Isa deposits are up 22 per cent while children's Junior Isas (Jisas) have soared by 40 per cent, according to investment platform Fidelity.
But with five types to choose from – Cash Isas, Lifetime Isas, Jisas, Stocks and Shares Isas and Innovative Finance Isas – which one would suit you best?
Here are some important questions to consider to help you to decide…
Saving for a rainy day?
A cash Isa is the most popular option, with more than 18 million savers holding nearly £300billion in them, according to HM Revenue & Customs (HMRC).
If you might want access to your cash quickly – such as in an emergency – you're best off with an easy-access cash Isa.
These allow you to make a withdrawal whenever you like, without penalties. Rates on top accounts are generous – just over 5 per cent on some.
If you want the option to regularly withdraw and top-up money in your cash Isa, opt for a flexible version.
Say, for example, you had £15,000 in your flexible Isa and withdrew £5,000 – you would then still have £10,000 left of your £20,000 allowance, rather than just £5,000 left with all other Isas.
If you have not opened an Isa before, a cash version is a great place to start. Build up three to six months of outgoings as a tax-efficient emergency pot before considering other types.
Are you looking to lock away savings?
A fixed-rate cash Isa is a great option if you want a secure, medium-term home for your money. You can lock away funds in these accounts for a set number of months or even years.
But beware: you may not be able to access your money before the term is up without shutting the account and paying a penalty.
Longer-term fixed-rate versions currently pay a lower interest rate than easy-access equivalents.
For example, the best-paying five-year fixed-rate Isa is paying 4.25 per cent from Shawbrook Bank.
But if interest rates fall, as predicted, easy-access rates are likely to drop, while you will have secured your fixed-rate for the duration of its term.
Saving up for retirement?
A workplace pension is likely to be the best option for saving for retirement, as you will benefit from employer contributions and tax relief at your marginal rate.
If you are self-employed, or a basic-rate taxpayer and already receiving the maximum amount you can in employer contributions, a Lifetime Isa (Lisa) can be a smart option.
You can open a Lisa if you are aged between 18 and 40 and can contribute up to £4,000 annually.
The Government adds 25 per cent to your deposit each year before you turn 50, potentially gifting you up to £32,000. You can then access the money when you turn 60 – a valuable retirement boost.
Building a first home deposit?
A Lisa is also a great place to save for your first home – but there are strict rules attached.
The property must not cost more than £450,000, meaning some buyers – such as in pricey London – could be unable to use theirs.
If you can't use a Lisa for buying a house, the second option is to leave it invested until you reach 60.
If you withdraw from it for any other reason, you'll lose 25 per cent of its value.
Saving for your child's future?
Isas aren't just for grown-ups. A Junior Isa (Jisa) lets parents invest £9,000 per child each year, tax free, until their 18th birthday.
There are two types: cash and investment. As many as 60 per cent of Jisas paid into last year were cash versions, but stocks and shares tend to outperform cash over the long term, although they can be more volatile.
'When investing for your children it's important to think about the timeframe,' says Laura Suter, director of personal finance at AJ Bell.
'If they are young, you have up to 18 years. This makes for a decent investment horizon as you have time to ride out the ups and downs of the market.'
Setting money aside for a teen?
A cash Jisa may better suit older children approaching 18 if they plan to use it shortly after they can access it, such as towards university costs.
'Cash tends to be a better place for money you need in the short term,' says Suter. 'Make sure you're putting it in the highest interest Jisa account possible.
'You'll also want to regularly check the rate hasn't dropped or if there's a better rate out there.'
Children can have a cash and an investment Jisa, so you can split your money between the two.
Building long-term wealth?
A Stocks and Shares Isa – also known as an investment Isa – is a great way to build long-term wealth that you can keep away from the taxman.
They tend to produce a higher return than cash Isas over the long-term – although with investments there is no guarantee you will make money.
Any income you generate from capital gains and dividends will be free of tax.
You will need to open an account on an investment platform, such as Hargreaves Lansdown, Interactive Investor and Fidelity. For a useful guide, go to thisismoney.co.uk/platform.
Protecting investments?
If you have investments outside an Isa, you can use a process called Bed and Isa to move them into an Isa to protect them from tax.
Ask your investment platform to manage this process.
They will sell your existing investments and reinvest them inside an Isa to shield future gains from capital gains tax and tax on dividends.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says: 'It makes sense to try to ensure all your gains fall within the capital gains tax allowance – which is £3,000 this year – so there's no tax to pay on profits.'
More risk for higher returns?
Innovative Finance Isas allow investment in peer-to-peer lending, offering potentially higher returns but greater risk.
They let you lend to individuals, companies or developers – bypassing traditional banks.
The loans are typically made by individuals clubbing together, so are sometimes known as crowdfunding or peer-to-peer (P2P). They tend to be riskier than other types of Isa because if a borrower defaults, you aren't covered by the Financial Services Compensation Scheme (FSCS).
Investors received an annual return of 8.83 pc last year, according to research by news site Alternative Credit Investor.
