It’s been 20 years since the introduction of ISAs – and interest in them (excuse the pun) has risen and fallen over the years. According to Bank of England statistics there is currently over £281 billion held in cash ISAs alone.
The last few years have seen a decline in the popularity of cash ISAs, since the introduction of the Personal Savings Allowance (PSA) in April 2016. But that is starting to change. Find out why.
Personal Savings Allowance – and its effects on ISAs
The Personal Savings Allowance is a benefit to basic and higher rate taxpayers who earn interest on cash savings accounts. Basic rate taxpayers pay 0% tax on the first £1,000 a year of savings interest that they earn. The PSA for higher rate taxpayers is £500.
However, as savings rates across the board have improved and the amount of money people are holding in cash increases, more savers will be close to or already breaching the PSA. As a result, there is more interest in cash ISAs once again – in more than one way.
Cash ISAs become more competitive
This year’s cash ISA season has been the most competitive that we’ve seen for a number of years. Best buy rates on savings products in general have been increasing and it’s been no different amongst cash ISAs. Over the last two years, the top easy access cash ISA rate available has increased by 40%. As I write this, the best rates on easy access cash ISAs are similar to those on standard savings accounts. Previously there used to be a gap (you’d get less in a cash ISA than in an ordinary savings account). But that gap has disappeared.
What are the best rates?
As with non-cash ISA accounts, if you can tie up your money, you can earn a better rate of interest.
Although best buy easy access cash ISAs and savings accounts pay a similar rate of interest, the same cannot be said for fixed rate accounts. Here, there is still a more pronounced gap – with fixed rate savings accounts (often called ‘bonds’) paying more than fixed rate cash ISAs.
But if you are likely to use up your Personal Savings Allowance, the tax-free rate on the best cash ISAs will still be providing a better return than the interest rate on the non ISA equivalents, once you’ve paid tax on it. So, you will often be better off by protecting your interest in these valuable tax free accounts.
Best buy cash ISAs
At the moment, the best easy access cash ISA is with the Coventry Building Society – the Easy Access ISA (Online)(2) is paying 1.47% tax free/AER. But as the name suggests, this can only be opened and managed online. However, all is not lost if you don’t like online savings accounts.
Kent Reliance’s Cash ISA – Easy access issue 18 can be opened and managed in branch and by post, as well as online and is paying 1.46% tax free/AER.
Fixed rate cash ISAs
For those who can tie some of their cash up, the best rates on fixed rate cash ISAs range from 1.71% tax free/AER fixed for one year, from Dudley Building Society, to 2.30% tax free/AER fixed for five years – this time with Shawbrook Bank.
Rates are changing all the time so check Savings Champion’s best buy tables for up to the minute information.
Transfer old cash ISAs
And it’s not just your current ISA allowance that can take advantage of these best buy rates. If you haven’t reviewed old cash ISAs for a while, there is a chance that the rate you are earning has dwindled over the last few years. So, check the rate you are earning and move it if it’s no longer competitive. Always check for any penalties before you do this. You could be surprised at just how much more valuable tax-free interest you could be earning.
This is a guest article by Anna Bowes of Savings Champion.
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