Think of the ISA wrapper as a little like a Tupperware pot, protecting your lovely savings from all sorts of germs and nasties. In this analogy, the nasties would be tax bills. Within an ISA, any increase in the value of your savings and any income you receive is tax-free. Good stuff.
In the 2016/17 tax year, you can put in £15,240. It’s due to go up to £20,000 from April 2017.
What are my options?
A cash ISA works just like a savings account and offers the same range of options. For example, the rate will vary depending on how the ISA is structured, whether it is fixed term, for example, or online only, or offers easy access. In general, you will get a higher rate for leaving your money alone – so longer fixed terms and online access tend to pay more.
The top fixed rate ISA is from Tesco Bank and offers a rate of 1.11% for the first year.
For those willing to tie their money up, Paragon Bank offers a three-year fixed term ISA paying 1.25%.
For those of you with kids, do have a look at cash Junior ISAs too as these rates are often pretty good compared to those on offer for us oldies. This money is for your kids though and they do stand to get it when they turn 18. And you can’t do much to stop them!
What are the benefits?
There aren’t many downsides to ISA wrappers. They are mostly free. They are flexible, so money can be taken out at any time. Investors can build up a nice pot without ever having to trouble the tax man. You don’t even have to put it on your tax return. Equally, your cash up to £75,000 should be protected under the Financial Services Compensation Scheme, though you should check this in the small print.
Who might it suit?
Most financial advisers recommend that you keep at least three months’ salary in cash as a cushion. So, should this sit in an ISA? The no-brainer answer used to be OF COURSE but the first £1000 of income you receive on your investments is tax-free anyway now, under the new personal savings allowance. However, if you are planning on saving up over the years, it doesn’t hurt to have your cash in an environment which you are sure is tax-free.
Is a cash ISA the right sort of ISA for you? If you have a long enough time horizon (at least three years or more), and can tolerate a bit of bumpiness along the way, it may be better to use your ISA allowance to invest in assets that offer a higher potential return, such as the stock market. Maybe have a squizz at what we call Equity Income funds which pay out dividends – which feel a bit like getting interest. Some mainstream options pay out about 3% – 4% today. Although the actual sum of money isn’t guaranteed, unlike with cash.
Most Junior ISAs also sit in cash – over 70% of them. If you’re saving for someone still in nappies, then do look at the stock market (which over longer time frames is likely to do better than cash).
If the stock market is not for you, or you’re likely to need the cash quickly, cash ISAs are a good way to go but make sure you seek out the best rates and review at least annually as rates moves around a lot.
Where Can I Get One?
There are plenty of options. The first port of call for many people is their bank. This is unlikely to be the best option. We like comparison website Savings Champion, which allows you to search across the different options. Or check out This Is Money. Sometimes just 10 minutes shopping around can really pay its way.
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