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Should I save in a cash Individual Savings Account?

Each month, James writes in Essex lifestyle magazine, BeauLieu.  This is a reproduction of his March 2020 column.

With new Chancellor of the Exchequer, Rishi Sunak, due to announce his first budget on 11th March, there’s a lot of interest in what he will do and whether he will help savers.  Inevitably, much focus is on Individual Savings Accounts (ISAs), which turn 21 on 6th April. 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 banks pay interest without any tax deduced now whereas previously you had to fill in a special form for this to be done. Basic rate taxpayers can earn £1,000 in savings interest before they need to pay tax and higher rate taxpayers can earn £500 in interest before paying tax.

A basic rate taxpayer could have over £76,000 in the top paying instant savings account (1.31% from Virgin Money) and not pay any tax on the interest. Higher rate taxpayers will need more than £38,000 to tip over their allowance.

 

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

A cash ISA is similar to an ordinary savings account, it’s just the ISA has got a tax wrapper around it which means savers aren’t liable to pay tax on the interest they earn.

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 2020, 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 1.65% whereas the best one-year ISA pays just 1.41%. Similarly, on a five-year fixed 2.10% can be found on a standard account whereas the best five-year ISA is 1.70% by comparison.

 

Are cash ISAs irrelevant 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 £161,500 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.

There was little consultation from the government before LISAs and, as a result, there are only five providers of a cash LISA, Moneybox, Paragon Bank, Skipton, Nottingham and Newcastle Building Societies. Moneybox pay an attractive 1.40% interest on their LISA.

Those saving for a home will find the 25% bonus very attractive and should certainly consider a LISA if they are saving for a deposit, but only if they will definitely buy a house with it or don’t need that money before they are 60. This is because, if you take some or all of the money out of it before then (other than to buy a property) you pay a 25% penalty on it.

This doesn’t put you back where you started, it makes you worse off. For example, if you saved the full £4,000 and got the £1,000, you have £5,000 (ignoring interest). A 25% penalty on that means you repay £1,250 so are £250 down on what you put in.

4) Savers who may need access to their cash

Savers looking at easy access may want to consider a cash Isa because they actually pay similar or slightly better rates e.g. Al-Rayan’s cash easy access ISA pays 1.36% versus Virgin Money’s 1.31% for ordinary easy access savings.

Savers considering fixed-rate bonds but who 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.

 

Will the budget bring any cheer for savers?

Sadly, I think the budget has come too soon for the new chancellor and the best I think that savers can hope for is an increase in either/both the personal savings allowance and the ISA allowance, which has remained at £20,000 since April 2017. Sadly, I fear that there will be nothing in the budget for savers. However, the new chancellor may wish to make his mark with something new and the optimists among us will be hoping that he decides to do so and that savers are his focus.

Either way, I will update readers in my April column!

 

What are the best rates currently?

As we have witnessed recently, the savings market changes extremely quickly. 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

1.31%

Virgin Money

Notice

1.65%

Investec

1 Year

1.65%

Bank of London & Middle East

18 Months

1.70%

Bank of London & Middle East

2 Year

1.80%

Bank of London & Middle East

3 Year

1.85%

Bank of London & Middle East

4 Year

1.95%

Bank of London & Middle East

5 Year

2.10%

Gatehouse Bank

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