Cash ISAs: What do I need to know?

What do you do when inflation rips into any hope of a ‘real’ return when interest rates are ridiculously low? Turn to ISAs…..of course!  The fact is you don’t have a choice – stashing your cash under the bed means you’re missing out on any marginal extra income while inflation still bites.
Tying up your cash in assets and investments doesn’t leave a lot of leg room to enjoy your money when and as you like, so what better way to try and recoup what’s left of any interest floating around and dip into your savings (because you’ll need to after the recent budget) than going for an ISA?

Figures show that 24% of Britons will take advantage of their full ISA allowance, while 18% will use some of their allowance in this tax year. According to NS&I, only 9% of Britons are put off by interest rates and returns, compared to 10% last year and 30% in 2010

John Prout, NS&I’s Retail Customer Director, said: “ISAs are usually the first port of call for people looking to save and it’s encouraging that almost half of us are utilising the tax-free shelter that ISAs provide. With the end of the financial year fast approaching, now is an important time for everyone to review their savings.”

There are a number of things to consider when looking for a new ISA account. Firstly, you will need to think about how much you’re looking to save and for how long. Do you want to have the ability to dip into your ISA or lock away your cash for a fixed amount of time?

Cash ISAs

One of the many benefits of having an ISA account is that you’re not paying any tax on your money. So this makes them  significantly better than a savings account; for example, if you’re a basic-rate taxpayer you usually have to pay 20% tax on any interest you earn on your savings (more if you’re a higher-rate taxpayer), but if you’re the proud owner of a cash ISA account you will still get to keep that  20% on your money.

How do they work?

They way ISAs work is simple and they are very similar to savings accounts in the way that they are instant access, notice or fix-term accounts.

Some fixed rate cash ISAs are actually called bonds, which means that if you withdraw cash before the agreed time there are penalties such as a 90 day loss of interest.

The main disadvantage of a fixed term ISA account is you can’t access the money during the term, which is usually about a year or two.  You can only invest one amount at one time, so these are suitable if you have a considerable amount you are willing to invest.

Whichever cash ISA you decide to take out, compare ISAs with Propertywide.

How much can I invest?

Anyone aged 16 or over can invest up to £5,640 in a cash ISA this tax year, which increases to £5,760 in April. You can only have one cash ISA account each tax year and only put new money in the accounts. You can deposit your full allowance but if you withdraw some of this money during the year you cannot go back and top this up.

For example, if you pay the full £5,640 into your cash ISA and then withdraw some money, you’ll have to wait until the next tax year to put in more.

What are the benefits?

According to research from HSBC, cash ISA savers are able to build their nest eggs three times as fast as it takes those putting their savings in instant access savings accounts.

If a saver was to invest their full cash ISA allowance, which is £5,760 from 6 April, based on current average cash ISA rates, they could expect their pot to have grown to £6,291 in five years marking a massive 9.2% increase. Not bad for cash which is just sitting there.

HSBC says someone saving the same amount in an instant access savings account, paying tax on their interest, would see just 3.3% growth after five years if they were a higher rate taxpayer and 4.4% if they were a lower rate taxpayer.

Higher rate taxpayers would have to wait a further nine years to hit that £6,291, at which point cash ISA savers would have earned an additional £1,083 in tax-free interest.

Posted by: Nicola Severn Categories: Finance Tags: , Comments Off on Cash ISAs: What do I need to know?

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