With the outlook seemingly bleak, savers are asking whether using their cash ISA allowance is worthwhile, especially when there are high interest rate current accounts that pay better interest, even after basic and higher rate tax has been deducted.
The problem is that if you don’t use your ISA allowance within each tax year, you lose it forever. And while this may not seem to be a great loss right now, it would mean a reduced lump sum available to earn tax free interest in the future. Savers shouldn’t forget that they could have amassed a hefty lump sum sheltered in a tax free environment.
If someone had invested the maximum amount into cash ISAs since 6th April 1999 they could now have almost £66,000.*
In addition if they had invested the maximum each year into the TESSA from 1st January 1991 and then kept the money in a tax free account – their original stake of £9,000 invested over the 1st five years, could be worth almost £23,000.
So in total, savers could have at least £89,000 sheltered in a tax free cash ISA. Even with rates as low as they are, this could mean almost an extra £500 in tax free interest per year, for a basic rate tax payer, when compared to a taxable account. Better in your pocket than in the tax man’s.**
And when rates do become competitive once again, this would become even more valuable.
We are expecting this to be one of the worst ISA seasons that we have ever seen, however savers mustn’t forget the long term benefit of saving into a cash ISA, even if currently there seems little point.
What is essential right now is to keep on an eye on all of your savings rates, including cash ISAs and switch if they are not earning a competitive return.
* Assuming the maximum cash ISA allowance was invested on the first day of the tax year and earned the equivalent of the Bank of England base rate, the amount that would currently be held in cash ISA would be £65,991. In addition, if the maximum amount was invested into a TESSA from 1/1/1991 each year and again earned interest equivalent to the Bank of England base rate, the TESSA cash could now be worth £22,923.
** The current best easy access cash ISA rate is 1.75% tax free/AER. The best easy access standard savings account is paying 1.50% gross (or 1.20% net of basic rate tax). £89,000 in cash ISA paying 1.75% would earn £1,557.50 tax free interest, compared to £89,000 in a standard savings account paying 1.20% net which would earn £1,068 pa.
For those prepared to tie up their ISA cash, Skipton Building Society is offering a tax free rate of 3%, fixed until 16th March 2019. This would mean an annual interest of £2,670, compared to £2,136 for a basic rate taxpayer, or just £1,602 for a 40% tax payer, in the current best fixed rate bond which is paying 3.00% gross/AER again with Skipton.