ISAs have long been thought of as the darlings of the savings market, with these nifty little accounts allowing you to earn interest entirely tax-free. Here, we go into a bit more detail about why you might want to choose a Cash ISA.
First and foremost, it’s the tax-efficient nature of these accounts that makes them so worthwhile. Unlike with some other accounts where tax may be due, the money held in these accounts – and the interest you earn from it – is completely free from tax. This means you won’t need to give the taxman any of your hard-earned savings, no matter how much you accumulate over the years.
It’s true that the personal savings allowance gives people the chance to earn up to £1,000 in interest tax-free each year, but if you breach that limit – such as if you have a particularly large savings pot – you’ll still have to pay tax. ISAs remain tax-free regardless of how much you have saved, and can be particularly beneficial for higher or additional rate taxpayers, who get a lower or no personal savings allowance.
You’re only allowed to deposit a set amount each year into an ISA – which for the current tax year is £20,000 – but if you invest up to this level every year, it could seriously add up. Even better would be if you consolidated your previous years’ savings into a single pot, allowing you to benefit even more from the magic of compounding and earn interest on a higher balance.
Cash ISAs come in both variable and fixed rate arrangements, which means there’ll be an account for just about everyone. Variable rate ISAs with no withdrawal restrictions can be ideal for those who want an emergency fund while benefiting from complete tax-efficiency, while others may be thinking longer term, in which case they can opt for a fixed rate ISA – probably by investing a lump sum at the start of the new tax year – to receive guaranteed interest over the term.
Variable rate ISAs in particular tend to have low initial deposit requirements and limited opening restrictions, with it possible to open one with as little as £1, allowing just about anyone can get into the savings habit with ease. Others have higher deposit requirements, particularly in the fixed sector, but as mentioned above, these accounts tend to be more popular with investors who are thinking longer term and have a lump sum they want to invest.
ISAs can often be highly flexible too, again even more so in the variable rate sector. Easy access ISAs give you the opportunity to access your funds or make further deposits whenever you wish, putting you in in total control and giving you the freedom to save as much or as little as your budget allows (as long as you stick within the ISA limits), while offering the chance to withdraw your cash should one of life’s emergencies hit. Even if you’ve got a fixed rate ISA, most will allow you to transfer out or close the account if you need, though this will typically be subject to a hefty interest penalty.
As with the rest of the cash savings market, cash ISAs are very low-risk savings products. Unlike with investments, there’s no way you can get back less than you put in (although you might need to contend with the effects of inflation, and remember that if you choose stocks & shares ISAs the risks are higher and you may not get back your initial investment), and you’re covered by the Financial Services Compensation Scheme for up to £85,000 should the bank or building society go bust.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.