Cash savings or Cash ISA?

British adults have been cutting back on their savings, typically saving £34 less than they did a year ago, a new poll quoted in Money week has revealed.
In its second annual savings survey, specialist bank Aldermore reported that UK savers are not putting away as much money.  Some find its hard enough making ends meet. Others say low interest rates have put them off saving.
When inflation was running at its highest – 3% and above – savings lost buying power faster than they grew.  Now inflation has fallen. The consumer prices index rate of inflation was 2.4% to June 2018, according to the Office for National Statistics. There are ways to save that can beat inflation – but should you choose a savings account or a Cash ISA?

Saving accounts

Putting cash in a savings account is easy. You can pay in as much as you like and put in a lump sum or save regularly. The money is there when you want it is, and the Financial Services Compensation Scheme will protect the first £85,000 you hold with any one bank or building society if it goes bust.

Getting the best returns may be a little more difficult. You will probably need to look at long term fixed rate accounts which require you to lock your money away for a set time. Returns of 2.7% may be achievable, but you may need to commit to saving for up to five years.

Five years is a long time to lock up your money. Most accounts will let you take your capital back if you need it sooner, but this will probably mean losing some or all of the interest it has earned.

There is another solution. Some current accounts offer sign-up rates better than term accounts. These are promotional and may only last only a few months, but you can save tactically, by keeping an eye on the best offers and moving funds as soon as a better rate appears. 

Since the introduction of a personal savings allowance in the 2016/17 tax year, most people will enjoy the return from their savings accounts tax free. Basic rate taxpayers can receive up to £1,000 of interest tax-free each year.

What about a Cash ISA?

Cash ISAs mean more restrictions. You can only contribute up to £20,000 in the current tax year, and you may not be able to put money back in if you need to take it out. The rates offered by Cash ISAs vary, but it looks as though few, if any are offering the same level of returns possible with careful selection of savings accounts.

However, the point of any ISA is the ability to protect interest earned from the taxman. The personal allowance removed this as an advantage. For most people – whose savings are not large enough to breach the £20,000 limit – there is very little advantage to saving with a Cash ISA.

When a Cash ISA does make sense

Basic rate taxpayers may not see much benefit from a Cash ISA, but higher rate and top rate taxpayers may see some advantages. Higher rate taxpayers get just £500 allowance, and top rate taxpayers get none at all. For these groups, the tax efficient status of savings in an ISA makes more sense.

Remember, once in an ISA, savings and the interest they earn stay free of income and capital gains tax permanently. So, if your plans include making the most of saving for the long term a Cash ISA could still have a part to play.

Cash ISA or savings, our online rate finder tool could help you find the best rates available.

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:

moneywise.co.uk – Savings squeeze: Brits earn more but save less than last year – 25th July 2018

moneywise.co.uk – Savings accounts to beat inflation – 19th July 2018

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