Cash ISAs are a savings mechanism that allow you to save without paying tax. For the April 2016/17 you can invest up to £15,240 and the interest on that sum will be tax-free. That’s the good news – the bad news is that interest rates on cash ISAs can be low so you’ll have to shop around to get the best value for money.
Starting your search
With the UK rate of inflation at an all time low, and so many ISAs demanding the fiscal acumen of an actuary, it’s time to get on top of the jargon. An article in the Daily Telegraph suggests that any investor who wants to see the value of their ISA grow should look at variable cash ISAs. Even with these ISAs you’ll have to be careful – what goes up can indeed go down and this always applies to any investment. Also look out for hidden fees as well as withdrawal penalties with variables. Cash ISAs suit some investors – not all, and you can visualise what you might get using an ISA calculator.
New rules – new benefits
One of the main benefits of the new ISA legislation is that you can split the money you wish to put aside between a cash ISA and a stocks and shares ISA. The savings limit remains the same – £15,240, but you can expand your range of savings options. The allowances change in the tax year 2017/18 – from this date you’ll be able to invest £20,000 but you can’t carry over any of your old ISA savings. It’s a good idea to make the most of your current year’s tax allowance.
Keep the interest in mind
According to the website Money Saving Expert one of the main advantages of a cash ISA is that the savings and interest that you accrue won’t contribute to your Personal Savings Allowance (PSA). This means that you’ll never be taxed on your savings within the limits of your cash ISA.
To get the best from your cash ISA, you’ll have to shop around. Which magazine suggests that you’ll have to work out whether you can afford to lock away your savings for a fixed term or whether you might need to have instant access to your savings account – your cash ISA. It’s a good idea to start reading the financial pages of your daily paper in order to compare the different interest rates and terms and conditions of your cash ISA. In other words, be prepared to be flexible. The markets fluctuate daily – and so will your ISA.
Nuts and bolts
Essentially, the new laws concerning cash ISAs mean that you could earn up to £1,000.00 without paying tax if you’re a basic rate tax payer. This saving, unlike the PSA, is indefinite. You could earn even more tax-free interest if you invest in a fixed rate cash ISA. Remember that you can only open one cash ISA within the tax year.
You can only transfer ISAs from one account to another – but you’ll have to do some homework. You may be charged a penalty from your existing ISA provider if you choose to follow this course of action. The devil is always in the detail and if you find a higher interest paying account, the fees from your existing account may wipe out any of your gains.
The good news
Your cash ISA is backed by the government’s Financial Services Compensation Scheme (FSCS). If the bank collapses or any other aspects of financial mayhem appear on the horizon at least your cash ISA will be protected – just so long as your investment vehicle is endorsed by the Financial Conduct Authority (FCA).