This April will mark 20 years of ISAs, as the new ‘Individual Savings Accounts’ were introduced on 6th April 1999, replacing Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs).
And although today cash savers can utilise their whole ISA allowance - which currently stands at £20,000 - this wasn’t always the case.
Until 2014, you could only deposit half of the allowance into cash ISAs, which meant only £3,000 per annum in the early years.
In July 2014, the rules were changed so that - finally - not only could you make full use of your ISA allowance, even if you only wanted to deposit cash, you could also transfer any money held in stocks and shares ISAs into cash ISAs. Before this point, believe it or not, you couldn’t do this.
So, anyone looking to reduce the risk of their investment portfolio by moving their funds into cash, had to simply encash their stocks and shares ISAs and start again.
The good news is that today there is no prejudice against cash savers. The rules for stocks and shares ISAs match those for cash ISAs.
The current annual allowance is £20,000 in total, which can be split between cash ISAs, stocks & shares ISAs and/or the Lifetime ISA.
Even given the earlier restrictions on how much you could save into a cash ISA, if you had deposited the maximum each year, you would have put aside £141,520. Add interest to that and, even if you had only earned the equivalent of the base rate, you would have almost £155,000 earning tax-free interest. If you regularly switched to earn the best rates available, the tax-free nest egg would be worth even more.
Of course, cash ISAs have had some pretty bad press over the years, as frequently the rates offered pay lower than the gross rates of the non-ISA equivalents, especially over recent times.
This problem was exacerbated by the introduction of the Personal Savings Allowance (PSA) in April 2016 – at which point many savers found that they no longer paid any tax on their savings interest, as it was within their PSA of £1,000 (for basic rate taxpayers – it’s £500 for higher rate taxpayers). Why would someone who is earning less than £1,000 a year in savings income, opt for an account paying them a lower rate of interest?
As interest rates have risen, however, more people are using up their Personal Savings Allowance more quickly – so the humble cash ISA is becoming more important again, as a way to help savers avoid paying unnecessary tax.
Two years ago, the best easy access account was paying just 1% gross – so it would need a deposit of £100,000 to produce £1,000 in interest. With the best easy access account today paying around 1.50%, just £66,667 would produce enough interest to fully utilise the PSA for a basic rate taxpayer. If you were to deposit cash into a one year fixed rate bond, as the rates are higher, even less would be needed – just £49,752 into a bond paying 2.01%
This is reflected in the small ISA battle that is beginning to break out between a number of key providers – unsurprisingly, they are generally not high street names. Rather the lesser-known challenger banks are the ones leading the way.
Although it’s only mid-February, if early indications are anything to go on, this year we may see a better ISA season than in recent years.
The rates on best buy ISAs have been increasing more quickly than the non-ISA standard accounts and although ISA rates still lag behind in many cases, the gap is narrowing.
Arguably, making sure your cash ISAs are paying you the best rates is more important, as the interest earned will be tax free, regardless of how much you earn – whereas any interest over the Personal Savings Allowance on non-ISA accounts, is taxable at your marginal rate.
If you have £150,000 languishing in a Santander Easy ISA paying 0.60%, you would earn just £900 a year – and £65,000 would not be covered by the Financial Services Compensation Scheme (FSCS).
If you were to switch £85,000 into the current best easy access ISA with Virgin Money, paying 1.45% (although only two withdrawals are allowed each year) and the remainder into OakNorth paying 1.44% (unlimited easy access withdrawals), you could instead earn £2,168.50 – almost £1,300 more - and all your cash would be protected by the FSCS (assuming you didn’t hold other funds with either of these providers).
The bottom line is that, although they have been out of fashion, cash ISAs can be a really valuable part of a savings portfolio – so it’s important to review your current savings and make your tax-free money work harder.
If you need any further help with finding the accounts that are most suitable for your needs, please call us on 0800 011 9705 to speak to one of our expert savings specialists.
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