All you need to know about cash Isas
Cash Isas are frequently touted as the best home for savings, and they’re certainly popular. Since Isas were introduced in 1999, until April 2015, 69% of the £655 billion placed in them was in cash, says HMRC.
However, with the new £1,000 tax-free savings allowance for lower-rate taxpayers (higher rate: £500), starting in the new tax year from 6 April, arguably the benefits of saving in an Isa aren’t as great as they used to be.
That’s doubly so when you consider the rates on cash Isas are generally lower than you’d get from a taxable savings account. One-year fixed-rate Isas paid 1.17% on average in December, but their taxable equivalents paid 1.31%, according to the Bank of England.
As your £15,240 annual Isa allowance is split across savings, investments and, from April, new options such as peer-to-peer lending, you’ll need to consider that, too.
If you’re lucky enough to be saving or investing more than this, it’s probably better to prioritise putting money into an investment Isa, rather than a cash one. This is partly because of the new savings allowance, but also because investments will likely grow more over time, so the tax benefits can be more significant.
If you won’t be saving more than £15,240 this year, a cash Isa should trump a savings account for any long-term savings, unless there’s a big difference in interest rates.
This is because once cash is inside your Isa, it’s protected from the taxman for life, or indeed longer. If someone dies, they can pass their Isa (both cash and stocks and shares) to their spouse while keeping the tax-exempt status.
Isas should also be preferred because while the new savings allowance might sound generous in this low- rate environment, it’s not especially so if you pay 40% income tax. Any more than £25,000 in a savings account paying just 2% interest will go over the tax-free threshold if you’re a higher-rate taxpayer.
If you can get 4% interest on your savings in future, higher-rate taxpayers would pay income tax on interest with just £12,500 savings held outside an Isa.
What sort of cash Isa should I get?
Cash Isas are reasonably straightforward, but finding the right account isn’t as simple as comparing the advertised rates. Some accounts will let you deposit or withdraw cash freely, but others make it harder to access your money in an emergency. Here’s a round- upofthemaintypesof cash Isa, and their pros and cons.
These accounts are the best available across the UK, but you might find your local building society or credit union can do better. Check Moneywise.co.uk/compare for the latest list of Isas available across the UK (click to enlarge).
You can also keep an eye on our best cash Isa rates of the week.
Also known as easy-access Isas, these let you withdraw your money any time, without penalty. You’ll generally get less interest in return for this flexibility.
Watch out for accounts with ‘introductory bonuses’, which offer a guaranteed rate for a certain amount of time, as you will need to remember to move your money when the rate is cut, usually after 12 months.
Virgin Money has slightly different bonus conditions – the interest rate halves if you make more than three withdrawals in a year.
With these, you must plan your withdrawals in advance – with notice periods of between a week and six months. Rates tend to improve with longer notice periods. Some allow instant access, but you’ll forfeit some interest or have to pay a penalty to do so.
Also known as fixed-rate savings bonds, or simply savings bonds, these accounts tend to pay the highest rates on substantial balances.
On the other hand, they’re the least flexible with your cash: you will have to lock away your money foranywherebetweensix months and five years, and you won’t be able to add to your initial deposit.
Bear in mind you’re not just being paid a premium for the inconvenience of your cash being out of reach. Products with later maturity dates carry more risk that you’ll miss out on more interest elsewhere if rates on savings improve.
Help to Buy Isas
Launched in December 2015 to help would-be homeowners save a deposit, Help to Buy Isas (Hisas) offer a good deal if you are eligible to hold one. They’re only available to people who have never owned a property.
Market-busting rates of 4% are available with Halifax’s chart-topping account, and the government will top up your savings by £1 for every £4 you save, up to a maximum of £3,000 on a £12,000 balance. You’ll get the bonus when you complete your property purchase.
Couples can hold one Hisa each, so you could potentially get £6,000 free towards the cost of your property.
You are only allowed to save up to £200 a month into a Hisa, but you can also add up to £1,000 as a lump sum when you first open the account, so it will take just under five years to save enough to receive the full £3,000 bonus.
Read more at Help to Buy Isas: which account should I get?
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.