The 6th April brought a new tax year and a new ISA allowance of £20,000.
And while I know the readers of our articles are likely to be more experienced savers, I thought it would be useful to run through the best cash ISAs that are currently available – and which ones might be right for you.
There are four main types of ISA –
· Cash ISA (which can be opened from the age of 16)
· Stocks and Shares ISA
· Innovative Finance ISA – Peer to Peer Lending
· Lifetime ISA (LISA).
You can open either just one type – or one of each type each year – as long as the total amount deposited does not exceed the ISA allowance.
Cash ISAs are simply tax-free savings accounts, so effectively a wrapper around your savings account that means you are sheltered from paying tax on the interest you earn. Cash ISAs used to be a natural choice for cash savers but since the introduction of the Personal Savings Allowance (PSA) in 2016, many people no longer pay tax on their savings interest, so do not see the point in opening a cash Isa.
But there are those who are either close to or are already fully using their PSA (or don’t qualify in the first place). And some may worry about what happens when rates increase again and if the PSA were to be removed. These savers may still want to make use of this stalwart of the savings world.
As mentioned above, there are a number of different types of ISA and, in fact, even just in the cash ISA world there are a number to be aware of. As well as the standard cash ISA, there are also cash Lifetime ISAs (LISAs) and Junior ISAs (JISAs) – the latter of which are for children.
Another aspect of the cash ISA that puts people off is that the best cash ISAs are often lower than the best non-cash ISA equivalent accounts – although that’s not always the case. But ultimately, what is important is what you will actually earn. If you pay tax on your savings, the tax-free rate on an ISA may still be more than the net rate on a non-ISA equivalent account – even if the gross rate quoted is higher.
Like standard savings accounts, there are a number of different types to suit your needs. Here we review the top five Easy Access and Fixed Rate cash ISAs, plus the top five Lifetime ISAs and Junior ISAs.
Top Five Easy Access cash ISAs
Those who need access to their money in a hurry have little choice but to keep it on easy access even though the best rates are pretty pitiful at the moment – that said, the best easy access cash ISA rates are actually comparable with the non-ISA accounts. And when compared to what the high street banks are offering on their so-called savings accounts, you can earn significantly more. Barclays, Lloyds, Santander, Halifax, NatWest and HSBC are all paying some of the worst rates on the market – as little as 0.05% or even 0.01% on their easy access cash ISAs accounts – virtually nothing at all.
If you were to earn 0.01%, if you deposited £20,000 that means you would earn just £2 in interest all year. And although 0.45% still isn’t great, it does mean you could earn £90 rather than £2 – better in your pocket than in the banks’!
Top Fixed Term Cash ISAs
As the name suggests, if you open a fixed term ISA, you should be happy to leave your cash until the end of the term.
Fixed-term ISAs pay better rates that easy access , as you are essentially sacrificing access to your money, for a better return. That said, the difference between cash ISAs and Fixed Term Bonds is that you can access the funds before the end of the term if you really need to, which is one of the reasons that the rates are often lower on the ISAs than the equivalent bonds.
There will be a pretty hefty penalty if you do decide to encash or transfer to another provider within the term of the ISA however, which means that most people will leave this money alone.
First-time property buyers have been the lucky ones as they have the opportunity to open a lifetime ISA (LISA) – a savings account that not only pays tax-free interest but, more importantly, adds a 25% bonus onto every deposit made – as long as the account holder uses the account to buy their first home, or they keep it until they are at least aged 60. It’s important to understand the terms and conditions.
You must be aged between 18 and 39 to open a LISA and you are able to save up to £4,000 each year. The Government bonus of 25% is then added to the account the following month. This means that if you were to deposit the maximum £4,000, you will receive a bonus of £1,000 a month later immediately increasing your balance to £5,000.
There are penalties for unauthorised access to funds in a LISA, so make sure you understand what impact this could have on your cash. Read our earlier article here for more information.
Junior ISA (JISA)
The 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 a limit of £9,000 in the current tax year.
Junior ISAs 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 it stays within the limit, so it can be a great way of building up funds for the future.
But a key issue with Junior ISAs is that the child becomes entitled to the funds at age 18, so you need to be comfortable that they will use the funds for the intended purpose. If the child becoming entitled to a relatively large amount of money at age 18 is a concern, then keeping the funds in the parents’ names and gifting them at a later date or using a trust could be more appropriate, even if this is not as tax efficient as the Junior ISA option (both in terms of tax on the interest/growth from the investments and potentially from an inheritance tax point of view).
If you, your friends and family were able to gift a total of £9,000 a year to a child (the current Junior ISA allowance), if the investment were to grow at 2.50% p.a., they could be on to receive more than £200,000 when they reach 18. Now that’s a gift worth having! But also a huge responsibility.
Even a gift of £50 a month could make a big difference to their future – providing them with over £13,500 at age 18 assuming the same growth rate.