Cash ISAs

Cash ISAs are one of the most popular types of savings account available in the UK, thanks in no small part to the tax incentives they offer. But is a cash ISA the best option for you? What alternatives are available, and how do you choose the best product for your needs, circumstances and investment preferences?

We answer these questions and more in our comprehensive guide to cash ISAs…

What is a cash ISA?

A cash ISA (Individual Savings Account) is a type of savings account that lets you earn interest free of income tax. To be eligible for one, you must be a UK resident (for tax purposes) over the age of 16. Junior ISAs are available for anyone below this age, although these must be opened on a child’s behalf by a parent or legal guardian.

How do they work?

You can open one cash ISA per tax year. Any savings you put in are protected but interest rates are typically low compared to other investment products, such as a stocks and shares ISA. Some cash ISAs come with an introductory rates period where the interest is higher, before reverting to a variable interest rate.

Variable rate products are usually instant-access accounts where you can withdraw funds freely, but if you tied yourself into a fixed rate, there might be penalties to pay if you make a withdrawal during the initial period. There is also a possibility that you will lose out on the higher introductory rate if you withdraw cash early.

How much money can you save in a cash ISA?

You can contribute up to £20,000 in savings per annum, in line with the cash ISA allowance for 2020/21. If you withdraw money from a standard cash ISA account, this limit will not reset. So, if you had hit your allowance limit and took £2,000 out during the current tax year, you would have to wait until the following tax year to top up those funds.

There are products known as flexible ISAs which are exempt from this rule. If you have one of these accounts, you can top up any funds you take out to remain within the £20,000 cap.

Although you can only open one cash ISA per tax year, you could start up a stocks and shares ISA, Lifetime ISA and an innovative finance ISA during the same fiscal period. The £20,000 cap still applies but you could spread it over the multiple types of ISA.

You could generate more interest in your ISA by transferring your cash-based account to an investment-linked scheme. Be sure to speak to a financial advisor before doing this, as the level of risk is typically higher for stocks and shares ISAs.

The experts we work with can help you decide whether transferring your cash ISA elsewhere is a good idea for you, based on your circumstances, goals and appetite for risk.

What can you do with cash ISAs?

What you do with the funds you save up in a cash ISA is entirely up to you. You’re free to withdraw money from your account, but if you’re in a fixed rate deal, this could mean having to pay a fee or losing out on the higher interest rate of the introductory period.

Cash ISAs are also transferrable. You can move your account from one provider to another if you find one offering a higher interest rate, or even move your funds over to another type of ISA, such as a stocks and shares-based account, if that is a better fit for your needs and appetite for risk. You should speak to an independent financial advisor before making a transfer as their whole-of-market knowledge will help you make the right decision.

Whether you should choose a cash ISA or another type of savings account may ultimately come down to the reason you’re saving up. For instance, if you’re putting money away for your retirement or to buy a property, depending on your age, a lifetime ISA may be a better alternative.

Those with a higher appetite for risk, meanwhile, may wish to discuss the possibility of taking out an investment ISA with a financial advisor, instead of going ahead with a cash ISA.

What are the best alternatives to cash ISAs?

Most experts would recommend the following as potential alternatives to cash ISAs…

• Stocks and shares ISAs: These are often floated as a cash ISA alternative because the potential returns on investment-linked accounts are much higher than they are for cash ISAs. However, you should keep in mind that the value of your assets could fall as well as rise, so it’s important to speak to an expert before investing.
• Standard savings accounts: Since you can earn the first £1,000 of interest on non-Isa savings tax-free (£500 for higher-rate taxpayers), regular savings accounts have become a viable alternative to cash ISAs. Although ISAs can safeguard your savings if interest rates were to spike, it’s worth asking a financial advisor to compare the rates for cash ISA deals with savings account across the whole of the market for you.
• Lifetime ISAs: These may be a better option if the reason you are saving is to buy a property or build up a retirement fund to supplement your pension investments.
• Premium bonds: These don’t offer interest per se but can generate returns via a prize draw. You can invest up to £50,000 and there’s no risk to the money you put in. Every £1 invested is assigned a bond number and this is entered into a monthly prize draw where you could win anything between £25 and the jackpot of £1 million.

For many savers, there are higher returns on offer with some of these alternatives as well as added risk. To choose the right investment product for your needs, circumstances and requirements, speak to an independent financial advisor who can lay out the pros and cons of each choice. Make an enquiry and we’ll introduce you to one for free.

Speak to an expert

If you’re thinking of taking out a cash ISA, it’s always worth consulting with an independent financial advisor first to make sure this is the right option for your needs and circumstances. It could well be the case that an investment-based product offers potentially higher returns with a level of risk that you’re perfectly comfortable with.

And even if you are dead set on a cash-based ISA, speaking to an advisor will ensure you end up with the best interest rates on the market. So call 0808 189 0463 or make an enquiry and we’ll introduce you to the right expert for a free, no-obligation chat.