In a fast-changing financial world, some things remain certain โ one of those is cash. Whether its in your pocket or a saving account, cash is secure, easy to access, and simple to use.
At Continuum we recommend having a reserve of cash to deal with emergencies. A big bill, or a problem with your work can mean a reserve equivalent to 6 months income can offer real peace of mind.
Over a quarter of us are missing out on returns with cash idling in current accounts paying no interest according to research from the Building Societies Association. While cash is important, holding too much of it could mean your savings are not working as hard as they could.
Instead, you could consider transferring some of your cash into an easy- access saving account, where it remains accessible but can earn interest. Some accounts may offer rates close to 5%, though these rates often apply to limited amounts or are promotional and subject to change. Its important to check the terms and conditions, as well as the current market rate, which can fluctuate in response to changes in the Bank of England base rate.
But is there still a way to get returns on cash savings?
Consider a Cash ISA
ISAs โ Individual Savings Accounts - are of course simply a special type of home for your savings. There are several different varieties, but the simplest is the Cash ISA, designed for those who want a secure and rewarding home for their cash, and offering a big advantage over conventional savings, in the form of tax-efficiency.
In a standard saving account, most basic rate taxpayers can earn up to ยฃ1,000 in interest each year without paying tax, thanks to the personal saving allowance for the 2024/23 tax year. Higher rate taxpayers can earn up to ยฃ500 in interest tax free. However, any interest earned above this threshold is subject to tax โ 20% for basic rate taxpayers and 40% for higher rate taxpayers.
For example, a 5% return on a standard savings account may end up closer to 4% after tax for basic -rate taxpayers and closer to 3% for higher- rate taxpayers.
With an ISA, there is simply no tax to pay. Your money earns the full stated rate of interest, which means that your savings are much more rewarding, and grow faster. Not only is there no income tax to pay while your money is growing, there will be no capital gains tax when you come to cash in your ISA.
Higher rates and no tax to pay mean a Cash ISA could offer you higher returns on your money. For many people, that makes a Cash ISA the obvious choice.
With tax increases looking disturbingly possible anything, the case for getting ISA protection for your cash is stronger than ever. The only real disadvantage is that the government limits how much you can put inside an ISA (and keep out of the taxmanโs clutches) each year. There is no limit to the amount you can hold in an ISA overall, but you can only pay in up to your yearly allowance, which has remained at ยฃ20,000 for several years.
The tax advantages of an ISA donโt need to be limited to cash savings. You could opt for a Stocks and Shares ISA too. As an investment, there are no guarantees (as there are with a Cash ISA) but they can hold out the prospect of higher returns over time.
Think of the alternatives
An ISA can be as easy to use as an ordinary savings account. You can pay in a lump sum (up to ยฃ20,000 for the 2024/25 tax year) or make regular contributions. With many Cash ISAs, withdrawals can be simple and quick. Some ISAs even allow you to withdraw money and replace it without affecting your ISA allowance, provided they are flexible ISAs.
Investing in stocks or a Stocks and Shares ISA can be a powerful way to grow your wealth over the long term, especially in comparison to cash savings alone. While cash is safe and offers liquidity for emergencies, inflation erodes its value over time if it sits in low-interest accounts. A Stocks and Shares ISA, however, allows you to invest in equities, bonds, and other assets while benefiting from tax efficiency. Unlike a Cash ISA, where your returns are guaranteed but often lower, a Stocks and Shares ISA offers the potential for higher growth, albeit with the risk that the value of your investments can go down as well as up.
For those looking to balance safety and growth, a Stocks and Shares ISA can be a smart next step, particularly if you're able to leave the investment untouched for several years to ride out market fluctuations. You can diversify your portfolio across different asset types, and as with any ISA, all gains remain free from income and capital gains tax. However, itโs important to consider your risk tolerance and investment timeline when deciding how much to allocate to stocks versus keeping a reserve in cash. timeline when deciding how much to allocate to stocks versus keeping a reserve in cash.
An ISA can be as easy to use as an ordinary savings account. You can pay in a lump sum (up to ยฃ20,000) or make regular contributions with many Cash ISAs, withdrawals can be simple and quick, and with some you can even draw out cash and repay it and not affect your ISA allowance.
Ready to make your cash work harder, but need help finding an ISA with the most suitable features and top rates? Call us at Continuum for help with your search.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, or a recommendation to a particular investment or saving strategy you should seek independent financial advice before embarking on any course of action.
The value of your investment can go down as well as up and you may not get back the full amount invested
Unlike a Cash ISA, a Stocks and Shares ISA does not offer guaranteed returns, your capital is at risk. These investments do not include the same security of capital which is afforded with a deposit account. The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future.
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