🔔 Cash ISAs – the basics!

As we are now in the final month of the 2017/18 tax year, many savers’ attention will be turned to the cash ISA best buy tables as they either start planning for the new tax year or deciding where to put their current tax year allowance before it’s too late.

With so much attention drawn to cash ISAs at the present time, we go back to basics by looking at cash ISAs in more detail and the different options that are available on the market.

Click on the headings below to go straight to the section of most interest to you or read on.

•    Cash ISA Overview 
•    Variable Rate Cash ISAs
•    Fixed Rate Cash ISAs
•    Help to Buy ISAs
•    Lifetime ISAs
•    Junior ISAs
•    ISA Transfers
 

What is an ISA?

An Individual Savings Account (ISA) is simply a tax free ‘wrapper’ offering you a tax break, so that you are sheltered from some or all of the tax on the investment.

Every year, all UK residents aged from 16 have an annual ISA allowance. For this tax year (2017/18), the total ISA allowance is £20,000 and this will remain the same in the 2018/19 tax year.

You can choose to put the whole allowance in a cash ISA or, from the age of 18, invest in a stocks and shares ISA, an Innovative Finance ISA, a Lifetime ISA or have any combination of the four types, up to the maximum allowance. But you are only allowed to open one type of each ISA per tax year.

As the ISA market has evolved, there are different rules and terms & conditions, depending on the type of ISA(s) that you may be considering and it’s important not to fall foul of the rules or you may find that your ISA has to be unwound. 

At Savings Champion we specialise in cash savings and are experts in our field. For help and guidance about other types of ISA or investments, call us on 0800 011 9705 and we can help you to find a suitable professional to assist with your needs.

Are cash ISAs still worth considering?

On 6 April 2016, the personal savings allowance (PSA) was introduced, meaning all savings interest is now automatically paid without tax deducted at source.

Basic rate taxpayers can earn up to £1,000 of savings interest a year without needing to pay tax on it and higher rate taxpayers can earn £500 per year (additional rate taxpayers do not receive any PSA).

The most important thing to note is that cash ISA interest doesn't count towards your PSA, so you can earn it tax-free and still have your full £1,000 (or £500) PSA allowance.

Therefore, for additional rate taxpayers or savers with larger balances, who've used up the PSA, there remains a big tax advantage.

Also, it's worth remembering that while £1,000-a-year interest seems a lot now with interest rates at a lower level, if and when rates rise, more people may need to pay tax on their savings interest, as their PSA is utilised more readily.

Remember, if you do not use your ISA allowance, then it is gone forever, reducing the amount you can save tax free in the future. 

If your circumstances change or the PSA is scrapped, then you could be exposing more of your savings interest to tax by not taking advantage of all the tools in your savings armoury, including the humble cash ISA.

Cash ISA Overview

No tax is payable on the interest earned in a cash ISA, so if you’ve not used up your ISA allowance, you could be paying more tax than you need to.

Even non-taxpayers should consider a cash ISA as, over time, the amount they build up in this tax-free wrapper could become considerable; yet, under current legislation, they’ll never need to pay tax on it, even if their circumstances change.

Like savings accounts in general, cash ISAs come in many shapes and sizes. They can offer easy access to your money, access by giving notice or they can be fixed term accounts.

There are also newer types of cash ISA, such as the Help to Buy ISA, which is designed to help first time buyers to get on the property ladder and most recently the Lifetime ISA, which was launched in April 2017, although currently only one provider is offering a cash Lifetime ISA – Skipton Building Society.

For further information on cash ISAs, please contact us on 0800 011 9705 or download a copy of our free ISA Guide – Navigating the ISA Maze.

Variable Rate Cash ISAs

As the name suggests, the rates on these accounts are variable and come in two main varieties, easy access and notice ISAs.

Just like the non-ISA equivalents, easy access ISAs allow you to get at your money without giving any notice or paying penalties.

However, whilst they are straightforward, just like their non-ISA counterparts, there are sometimes introductory bonuses to watch out for, where the interest rate drops like a stone after the initial period, which is typically 12 months.

There are also cash ISAs that limit the number of penalty-free easy access withdrawals you can make in a year and if you fall foul of the rules, a much lower interest rate then typically applies for the rest of that year.

As always, make sure you carefully study the terms and conditions of the ISA before going ahead and if you go for one of these accounts, plan your withdrawals carefully or ensure that you know when your bonus ends.

• Sign up to our free Rate Tracker service that will send you a reminder when your bonus ends

Notice ISAs again work in pretty much the same way as a standard notice account and can generally offer you higher returns in exchange for restricting access to your money.

For those happy to sacrifice easy access and can plan withdrawals carefully, notice ISAs can work well.

Notice periods can vary between accounts and are not always a better option in terms of interest rate than some easy access ISAs, so make sure you look at a selection of different types of account before taking the plunge.

For a selection of the best-paying easy access and notice ISAs on the market, please refer to our Variable Cash ISA Best Buy table. 

Fixed Rate Cash ISAs

Fixed rate cash ISAs are similar to standard fixed rate bonds in many ways, offering a fixed return for a fixed term.

One of the main differences between fixed rate cash ISAs and fixed rate bonds is that some form of access to your funds has to be offered with a cash ISA, whereas you cannot access your money at all with many fixed rate bonds.

To access a fixed rate cash ISA there is usually a hefty penalty involved, so whilst the facility is there, it is still advisable to make sure you can tie funds up for the term, before proceeding.

The term usually ranges between one and five years and, generally, the longer you tie your money up, the higher return you receive is.

Obviously, this is not always the case, with rates varying wildly between providers, so make sure you look at the top rates available from the whole of the market before going ahead.

If you are looking for independent, whole of market information, as with any type of savings account, take a look at our Fixed Rate Cash ISA Best Buy Tables. 

Help to Buy ISAs

This type of cash ISA is designed to help first time buyers get onto the property ladder and has been around since December 2015.

First time buyers can save up to £200 per month (plus an additional £1,000 in the first month only) which then goes towards the purchase of their first home.

In addition to the interest earned on the money held in the account, the Government adds a bonus of 25% of the balance when the purchase goes through. The minimum bonus applied is £400 up to a maximum of £3,000.

The addition of the Government bonus is a good incentive for first time buyers to save regularly and whilst arguably the icing on the cake, there are some attractive interest rates on offer currently as well.   

For more information on Help to Buy ISAs download our factsheet and for the latest rates, take a look at our Help to Buy ISA Best Buy Table. 

Lifetime ISAs

The most recent addition to the ISA family is the Lifetime ISA, which works in a similar way to a Help to Buy ISA but allows those aged 18 to 39 to save either towards their first home or alternatively put money towards their retirement and still benefit from a 25% Government bonus.

The bonus can only be used for one of two goals at the present time, but it does allow people already on the property ladder to benefit from that Government incentive.

You can save up to £4,000 per year in a Lifetime ISA and the Government bonus is added annually until April 2018 and then monthly from then on in.

Lifetime ISAs can be either stocks and shares or cash ISAs, although there is only one cash Lifetime ISA at the time of writing.

Hopefully, the market will pick up in the future and there will be more competition, but watch this space and we will bring you developments as and when we get them.

• For more detail on Lifetime ISAs download our free factsheet

And if you want to know whether the Help to Buy ISA or Lifetime ISA is better for you, read our recent article which will give you a rundown of the pros and cons of both. 

Junior ISAs

A Junior ISA (JISA) is a type of tax-free savings account which is opened on behalf of a child.

Accounts can be topped up by parents, friends and family up to an annual limit, which is currently £4,128 in the 2017/18 tax year – moving up to £4,260 in 2018/19. 

Like adult ISAs, JISAs are available in both cash and stocks and shares varieties.

JISAs were introduced in November 2011, replacing Child Trust Funds. This meant that some children were stuck in these accounts, whilst providers focused their attention (and rates) on the newer Junior ISAs.

Luckily, the change in rules in April 2015 meant that those holding Child Trust Funds can now choose to transfer to a Junior ISA, meaning that they do not miss out on some of the higher returns available.

• View the best Junior Cash ISAs available today

JISAs are opened by a parent or legal guardian on behalf of a child, with the money in the account belonging to the child, although it cannot be withdrawn until they turn 18.

Parents, friends and family can all contribute to the Junior ISA, as long as the total amount stays within the annual limit, so it can be a great way of building up funds for the future. 

The main advantage of a Junior ISA over a standard children’s savings account is that parents can contribute into this account without falling foul of the tax rules that limit the interest on gifts from parents to less than £100 per year, per parent.

To clarify, if money given to a child by a parent outside a JISA earns gross interest of more than £100 in any tax year, the parent is taxed on all the interest at the parent’s marginal rate.

At an interest rate of around 3%, a parent would fall foul of this rule on savings of around £3,300 and, as the amount saved increases over time, it could have a significant impact going forward. 

ISA Transfers

Of course, if you are not happy with the interest rate you are getting or would like to switch to a different type of ISA, this is where ISA transfers come in.

Transferring your ISA to another provider ensures that not only can you pick a more suitable option for you, but if the process is followed correctly, the money stays in the ISA wrapper and does not affect the current year’s ISA allowance.

Approach the provider you would like to transfer to and they will help you with the paperwork and request the transfer on your behalf.

Never take the money out of an ISA yourself with the intention of moving it elsewhere, as that money will no longer count as ISA money and will count towards your annual allowance if you attempt to pay it in, something that will be impossible if you have already paid into an ISA in that tax year.

If you need any help or guidance with an ISA transfer, please do not hesitate to get in touch and call us on 0800 011 9705.

And finally, once you have chosen the best savings account, it’s no good simply forgetting about it; you need to keep an eye on the rate to make sure it remains competitive.

Again, we can help here. If you sign up to our Rate Tracker service, we’ll let you know when the rate changes on your account and how it compares to the top rates on the market.

And if you sign up to our Rate Alerts, we’ll let you know when new accounts come to the market, so you can see if something better has become available that you might want to switch to.

At Savings Champion we monitor the whole of the savings market, so please call us on 0800 011 9705 for more information on the best type of savings account for you.

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