Cash ISA or savings plan?

With the tax year ending on April 5th many people are still wondering about the best way to use their ISA allowance.
Large scale investors may have no such worries and might happily invest £20,000 in their ISAs this tax year, to be followed by another £20,000 in the 2019/20 tax year.

What should you do?

If you’re aged 16 or over, you can put up to £20,000 each tax year into a cash ISA. A Cash ISA puts a tax-free wrapper around your savings, so you pay no tax on the interest earned.  They used to be the first choice for savings because, being essentially tax-free, you ended up with more interest.

They would still be a rewarding way to save, were it not for the fact that interest rates are so low and that most people can use their personal savings allowance introduced on 6th April 2016, to avoid paying tax on their savings.

The allowance lets basic-rate taxpayers earn up to £1,000 in savings income tax-free. Higher rate taxpayers can earn up to £500. So, as a basic-rate taxpayer, you can have £50,000 in a top-paying 2% one-year bond, or any other high interest savings account offing the same level of returns and stay within the £1,000 limit.

It looks as though the whole point of the Cash ISA has been removed.

Where once banks and building societies tried to entice savers at the end of the tax year by offering competitive ISA rates, they don’t seem to be bothering any more. You may prefer to stick to higher-paying savings accounts – some of them seem to be offering better, if not exactly spectacular returns at the moment.

You don’t have to worry about your ISA allowance, or even – with some accounts – access to your money if you need it in an emergency.

But it might be a bit too early to write off the Cash ISA just yet.

Why there is still life in a Cash ISA

In the year before the personal savings allowance, ten million savers rushed to open a Cash ISA, putting in an average £5,801. Since then, the number has fallen – but not as much as might be expected. Around 7.8 million are saving an average of £5,114.

Why are they still putting money into what looks like an obsolete plan?

There are actually several reasons. If you already have a large balance in taxable accounts, you may be near to using up your personal savings allowance, especially if you are a higher rate taxpayer. Rates in savings plans are starting to edge up, and you could end up paying tax.

If you are a basic-rate taxpayer with a savings pot of under £20,000, there may be no reason to open a Cash ISA. Putting your money into a Cash ISA – and out of reach of the taxman – makes more sense if you are a higher rate taxpayer who may already be getting close to earning £500 in interest.

But there is another reason to look at a Cash ISA. Once your money is inside an ISA wrapper it can stay there – even if you decide to move it to another ISA.

If you don’t put it in an ISA each year, you will lose the £20,000 allowance for that year.

So there is a case for putting money into a Cash ISA now. You may have an expectation of rising rates in the future or want to give yourself the freedom to transfer it to a Stocks and Shares ISA, if and when you feel the time is right to become an investor rather than a saver.

To find out how to get the best rates on your cash click on our calculator and for any help on making the most of your ISA allowance please call us today.

The Financial Conduct Authority does not regulate deposit accounts.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

Book a free initial consultation

Book an initial consultation with one of our independent financial advisers or call us on 0345 643 0770 if you would like to discuss further.

Sources: – Are cash Isas worth it this year? Savers with modest pots could do better with an ordinary high interest account – but you’ll lose your tax-free perk! – 19th February 2019

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