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Are Cash ISAs (Individual Savings Accounts) still worth it?

As we approach the end of the tax year, we increasingly get asked by savers whether it is still worth their while saving in a cash ISA. With interest rates typically much higher on ordinary savings accounts, and the introduction of the Personal Savings Allowance in 2016, many savers question whether there’s any point in saving in a Cash ISA anymore.

 

The Personal Savings Allowance

In 2016, the government introduced a Personal Savings Allowance which means that basic rate tax payers can earn £1,000 in savings interest before needing to pay tax and higher rate tax payers can earn £500 before paying tax. As a result, banks pay interest without any tax deduced now whereas previously you had to fill in a special form for this to be done or tax would automatically be deducted.

This means a basic rate tax payer could have over £65,000 in the top paying instant savings account (1.51% from Family Building Society) and not pay any tax on the interest. Higher rate taxpayers will need £33,000 or more to tip over the allowance.

 

What is the difference between Cash ISAs and ordinary savings accounts?

A cash ISA is not dissimilar to an ordinary savings account, it’s just got a tax wrapper around it which means savers aren’t liable to pay tax on the interest they earn. Think of it like a two chocolate bars, one still in the wrapper and one out of it – they are the still the same chocolate bar!

The main difference is the interest rates charged on the different accounts. In the early days of ISAs, there were some very competitive rates as providers fought for your cash ISA savings. In 2019, it is a very different situation with ordinary savings accounts often paying more than their cash ISA equivalents – sometimes considerably more.

For example, the best one year fixed rate is 2.20% whereas the best one year ISA pays just 1.74%. Similarly, on a five-year fixed 2.70% can be found on a standard account whereas the best five year ISA is 2.15% by comparison.

 

So, are cash ISAs pointless now?

For the vast majority of savers, there will be little or no immediate financial benefit to open a Cash ISA instead of a traditional savings account. However, there are exceptions and the following types of people should still consider them:

1) Existing Cash ISA savers

Anyone who has opened an ISA every tax year since 1999, and used the full allowance, has been able to shelter over £141,500 plus interest from the tax man and, in April, will be able to add another £20,000 to that allowance. If you already have cash ISAs from previous tax years, it is worth considering retaining them to keep those tax free allowances.

2) Additional rate taxpayers

Those taxpayers who earn over £150,000 a year pay 45% tax and get no personal savings allowance so should definitely consider cash ISAs.

3) First Time Buyers

Lifetime ISAs, known as LISAs, are available for those aged 18 – 40 and you get a 25% bonus from the government each year on top of anything you save. First time buyers who save £4,000 get a £1,000 from the government. The bonus is paid every year until the saver is 50 years old.

LISAs are aimed at first time buyers saving a deposit to purchase a home and for those looking to save for retirement. They have been somewhat controversial because there was already a scheme in place (Help to buy) for first time buyers and pensions provide generous tax relief for savers with many financial advisors still considering this a better form of retirement saving.

There was little consultation from the government before LISAs and, as a result, there are only three providers of a cash LISA, Skipton, Nottingham and Newcastle Building Societies. Newcastle pay an attractive 1.10% interest on their LISA. However, those saving for a home will find the 25% bonus more attractive and should certainly consider a LISA if they are saving for a deposit.

4) Savers who may need access to their cash

Savers looking at easy-access may want to consider a cash Isa because the differential in rates is very small – with Virgin Money’s cash easy access ISA paying 1.45% versus Family Building Societies 1.51% for ordinary easy access.

Savers looking to build up a tax-free sum which they can keep for future years may consider this more important than a slightly higher rate.

Savers considering fixed-rate bonds but want access to the cash during the term might prefer the flexibility that fixed rate ISAs have. Almost all cash ISA fixed rate bonds allow some form of access with a penalty interest charge.

Other things to consider about cash ISAs are:

· Savers can move their money from a cash ISA to a shares ISA. Until recently this wasn’t something you could do but some people will like the flexibility this allows and may want to hold savings in cash for a period before investing.

· The Personal Savings Allowance (PSA) could change - there is no guarantee the PSA will be continue and the allowance could be cut or removed. Also, if interest rates rise, the value of the PSA will diminish too as smaller balances will then earn more interest and use the allowance up.

 

What are the best rates currently?

The savings market does move quickly, so we always recommend that you check our website for the latest rates. At time of print, our best personal savings rates are:

 

Term

 

 

Interest Rate

 

Provider

Instant Savings

1.51%

Family Building Society

Notice

1.90%

Charter Savings Bank

1 Year

2.20%

Bank of London & Middle East

18 Months

2.32%

Al Rayan Bank

2 Year

2.42%

Al Rayan Bank

3 Year

2.52%

Al Rayan Bank

4 Year

2.52%

Vanquis Bank

5 Year

2.70%

Bank of London & Middle East

That’s all for this month. If you don’t want to wait for next month’s update then you can subscribe to our newsletter by submitting your email address on our website!

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