One of the few bright spots of lockdown was the fact that it could help us save money. With no commuting during the working day or opportunities for fun in the evening, many of us have built up an unexpected cash bonus.
In the past, a Cash ISA might be one of the best ways to turn this spare cash into the beginnings of a real nest egg. However, Cash ISAs are looking a great deal less rewarding than they once did – so much in fact that you might be wondering if it is worth having one at all.
At Continuum we are asking if it really is time up for the Cash ISA.
The promise of a Cash ISA
If you’re aged 16 or over, you can put up to £20,000 each tax year into an ISA. A Cash ISA is simply a savings account which should offer absolutely dependable returns, but what makes them worthwhile is the fact that they provide a tax-free wrapper for your savings.
To find out more about ISAs and making the most of your allowance, please call us at Continuum for some free initial advice.
In other words, you pay no tax on the interest earned and no tax of any kind when you come to take your cash out. You end up with more of your cash in your pocket, and less in the taxman’s.
A Cash ISA works much like a normal savings account. Most high street banks offer them with fixed returns and the protection of the Financial Services Compensation Scheme (FSCS) ensuring your capital up to £85,000 is safe. You can contribute lump sums, or with some providers, put in cash monthly
But although Cash ISAs used to be a sound idea, two things have gone wrong for them.
The first is that the tax–efficient status does not look so exciting anymore. Since April 2016 most people can use their personal savings allowance to avoid paying tax on their savings.
This allowance lets basic-rate taxpayers earn up to £1,000 in savings income tax-free, while higher-rate taxpayers can earn up to £500. So as a basic-rate taxpayer, you can have £50,000 in an account paying 2% and stay within the £1,000 limit. You don’t need a Cash ISA to avoid tax on your savings.
The second problem with Cash ISAs is even more daunting. The interest they pay has dropped to record lows as Britain saved more than ever before over the course of the pandemic.
With interest rates so low, it could be argued that there is no point in saving at all. Inflation is on the up, and this means that the purchasing power of the cash you put away will fall faster than the interest it earns pushes the total up.
Putting money into a Cash ISA might seem to make little sense. But under some circumstances and for some savers a Cash ISA could still have a part to play in wealth creation strategies.
Why there could be extra time for the Cash ISA
If you are a basic-rate taxpayer with a small savings pot there may be very little reason to open a Cash ISA.
However, putting your money into a Cash ISA means putting it out of reach of the taxman permanently. Once your money is inside an ISA wrapper it can stay there – even if you decide to move it to another ISA.
Whether an ISA is right for you – and which kind of ISA – may depend on your individual circumstances. To arrange an individual consultation, please contact us at Continuum.
If you don’t contribute to an ISA each year, you will lose the £20,000 allowance for that year. So you could use a Cash Isa to protect money from the taxman while you decide how to use it.
Rising rates in the future, or the ability to transfer to a Stocks and Shares ISA if and when you feel the time is right to become an investor rather than a saver could both be very persuasive arguments for having a Cash ISA.
To find out how this might work for you, or to answer any other investment questions, please call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to 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.
The Financial Conduct Authority does not regulate deposit accounts.