Holding pic (Image: Getty)
Cash ISAs were the Cinderella of tax-free savings. That was until 2021 when interest rates started to increase after years of record lows. Times have changed and banks and building societies are now tripping over themselves to offer decent Cash ISA rates.
While the Chancellor Rachel Reeves is still believed to be planning to scrap or reduce the Cash ISA’s annual allowance, experts are urging savers to consider opening or adding to a Cash ISA this tax year.
READ MORE: Cash ISA £2.1bn update as £20k tax-free cap hangs in balance
The cash ISA limit for this tax year is £20,000 but that may change later this year (Image: Getty)
Craig Ritchie, a partner at GSB Wealth, said Cash ISAs are more attractive than ever. He said rising interest rates and frozen tax thresholds meant more savers had breached their tax-free personal savings allowance; £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers.
He said: “For those with significant cash savings, using a Cash ISA ensures interest remains tax-free, making them a far more attractive option than before.”
John Phillips, a financial adviser at AAF Financial, said Cash ISAs are an ideal short-to medium-term savings option.
He said: “Cash ISA’s are a great place for savers to hold money when the money is required within 5 years such as a house deposit, holiday and/or an emergency fund.”
Phillips explained UK residents can save up to £20,000 a year into a Cash ISA each tax year and they are protected by the Financial Services Compensation Scheme (FSCS).
He said: “Cash ISA’s can also be transferred if other accounts become available with better interest rates.”
Ritchie, said: “Cash ISAs provide savers with predictable and stable returns, making them ideal for individuals with a low appetite for risk or those who prefer certainty over potential higher returns.”
Phillipps said they could also be a useful gateway to those who wanted to invest at a later date.
“Many savers incorrectly assume that committing to a sash ISA locks them out of investment growth. If your objectives change, there’s always the option to transfer funds into a Stocks and Shares ISA, preserving the tax-free wrapper while adapting to your circumstances.”
Savers still need to be aware that a Cash ISA comes with one risk, that interest paid on the accounts simply will not keep up with inflation.
Phillipps said: “Even with today’s higher interest rates, long-term savers still face the potential erosion of purchasing power.
“In short, Cash ISAs are not a one-size-fits-all solution, but in the current climate, they offer advantages for certain savers and should be incorporated as part of a well-rounded financial strategy.”
The cash ISA rules
One: Use your ISA allowance.
If you don’t use your ISA allowance each year, you’ll lose it. Invest at the beginning of each tax year, 6 April, to get the maximum benefit. You can continue to add to your ISA each year, using your new ISA allowance. Chris Henderson, savings and payments director at Tesco Bank said: “Every year there is a deadline for using your annual ISA allowance, which is currently £20,000. The deadline is 5th April, and after midnight on this date the allowance resets with the new tax year. Customers who still have some ISA allowance left for the current tax year should therefore consider acting now. If you don’t take advantage of your allowance before the tax year ends, you’ll lose it and have to use next year’s allowance instead.”
Two: Cash can be king
Victor Trokoudes, chief executive of Plum, said a cash ISA can be a useful savings buffer. Ideally you need around three to six- months worth of mortgage/rent once you have built up enough savings for using your ISA for investments is usually the best option.
“While investing isn’t not a suitable option for those who are building their emergency financial buffer, for example, if you were saving for a house deposit and wanted to buy soon or had a special event like a wedding coming soon, you likely wouldn’t want to put your capital at any risk in the stock market.”
Three: Shop around
Someone saving £10,000 could lose £255 a year by refusing to save into a specialist savings bank, according to Shawbrook bank. Paul Went, managing director of savings at Shawbrook, said this saving came when comparing £10,000 saved into a 4% AER Easy Access Cash ISA versus 1.45% – the average rate of the ‘Big five’ including Barclays, HSBC, Lloyds, NatWest, Santander.
“While specialist banks might not have the same name recognition as some mainstream banks, they can be the best-kept secret for those looking to make their money work harder. Inflation is increasing again, so every pound of interest earned matters. Now is the time to start looking at new accounts and using up any remaining ISA allowance. By broadening their search beyond the brands they already know, savers really can have their cake and eat it too.”
Four: Have a good idea how much you want to save
Chris Henderson, savings and payments director at Tesco Bank, said ISA savers need to decide how much they need to save.
“Having a clear figure in mind can motivate you to reach your goal faster.”
“Next, work out how many months you’ll need to be saving for, to hit your target. This is important if you need to save for something by a certain time, like a wedding or a house deposit. Once you’ve got into a routine, you’ll feel more in control of your savings.”
“Setting up a monthly transfer to your savings account will also help you to stay on track. This helps earmark money for savings so you don’t spend it elsewhere. Whenever you spend less than you think, consider putting the extra money straight into your savings pot, as that’ll help you reach your target faster.“If you know you don’t need quick access to your savings, or if your savings goal is more long-term, you can consider a fixed rate savings account. This will lock in a savings rate for a set amount of time. It’s important to remember that a fixed rate means you won’t see any rises or falls in your returns if the Bank of England makes changes to its base rate. However, a fixed rate can give you peace of mind from a consistent return on your savings.”
Five: Don’t be blinded by introductory rates
Cash ISA savers can lose out on £800 million each year thanks to teaser interest rates Tembo has claimed.
It estimates UK savers could increase their annual interest returns by nearly three times by transferring their Cash ISAs to a provider offering a better underlying interest rate. With a Cash ISA balance of £20,000, that would equate to an additional £620 interest being paid each year.
Richard Dana, founder and CEO of Tembo, said: “With only 23% of savers switching accounts each year according to the FCA Cash Savings Review, Tembo calculates that £38bn of savings put into accounts that featured an introductory rate could now be earning interest on a lower underlying rate.”
He added: “Bonus or teaser rates are used by companies to attract new customers, in the knowledge that the majority of those customers will not be motivated to move their money in six-12 months time. They also clearly penalise loyal, longstanding customers who end up earning less interest than new customers. It is vital that customers are aware of the impact of these introductory offers so they can make an informed choice.”
