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Cash ISA need-to-knows: why it's time to sit up and take action
The New Tax Year party hangovers are now long gone (what, you didn’t have one? Shame). It was a great celebration for savers – a new ISA year and the biggest ever.
So far, only the financial first adopters have taken advantage, but everyone with savings should sit up and take action.
Everyone aged over 16 in the UK has a brand new cash ISA allowance, and unless you’ve already put money in since the tax year started on 6 April, you can put £5,940 in your cash ISA allowance (or up to £11,880 in stocks and shares).
Here are my need-to-knows.
Cash ISAs really are quite simple
I wish I could hypnotise people reading the words “cash ISA” to instead just see: "IT'S A SAVINGS ACCOUNT YOU DON'T PAY TAX ON."
Just like there are easy access, fixed and regular savings accounts, there are easy-access, fixed and regular savings cash ISAs too.
You keep more of your interest in an ISA
Earn £100 interest in a normal savings account and, as the taxman would take 20% of it for basic rate taxpayers, you'd only receive £80 (at 40% higher rate, you’d only receive £60).
In a cash ISA, as there's no tax, you keep the whole £100. So, as long as rates are similar, ISAs win and top ISA rates tend to be higher anyway.
Most importantly, once money is in a cash ISA, it stays tax-free, YEAR AFTER YEAR. So if you've big savings, you can gradually protect more and more of your cash from tax.
If you'd started saving when ISAs were first introduced in 1999, you could now have £85,000+ in tax-free savings. Though if you have old ISAs, it's worth checking their rate –if it's low you have a right to transfer them. You do this by asking the new provider to move it across (don’t withdraw the money, then it's no longer in the ISA).
The ISA limit rises to £15,000 on 1 July, but don’t wait
Currently, you can put £11,880 in ISAs, half of which can be in cash. Yet from 1 July, ISAs turn into new ISAs (NISAs) with a £15,000 allowance, which can be ALL in cash if you choose – a huge increase in the allowance.
Here are the two questions I'm most asked:
- If I open a cash ISA now, what happens in July? You'll be able to top it up to the full £15,000 if you choose, and it'll all count as your 2014/15 allowance.
- Should I wait until July for higher rates? Many have asked me this in the hope there'll be better deals given the launch of NISAs. Yet I doubt it'll be that hot.
This ISA season (the time around April, when one tax year ends and a new one starts), we've seen virtually no uplift. Banks don't need savers' cash, as the Government has helped them via Funding For Lending, so I wouldn't hold off.
Even if rates are a smidgeon better in July, it's safer to open a top easy-access cash ISA, so you bag the gain now. You can transfer it to a better rate then (as long as that provider accepts).
The top cash ISA rates
These change almost daily at the moment, so while my picks below are correct at the time of writing, just in case, I’d urge you to check the latest at www.moneysavingexpert.com/cashISA.
- www.nationwide.co.uk's regular saver pays 2.5% AER (min £1 - no transfers) and allows you to withdraw the money whenever you want. It's designed for you to save in each month, yet as long as you’ve £1 in there you don’t need to.
As the maximum monthly contribution's £1,250, if you've less, you can just dunk it in now as a lump sum. Even if you've a bit more, and drip-feed it in over two months, its high rate means it’s the best easy-access deal. However, the rate’s variable and is likely to drop after a year, so keep an eye on it, and transfer out if it drops (see later).
- www.halifax.co.uk/'s 1.55% AER (min £1). Transfers allowed. This is the top straightforward easy-access deal, where you can put in lump sums and withdraw them whenever you want. The rate includes a bonus of 1.3% for a year, so diarise to ditch and transfer once the rate drops.
However, many people wrongly plump for easy-access, because they ‘may’ need their cash. In fact, unless you'll definitely need to take the cash soon, you can earn more with a fixed-term, fixed-rate cash ISA as by law they must let you access your cash. Though they can have strict conditions and can charge penalties if you do this.
- www.coventrybuildingsociety.co.uk is my top pick of these. It’s a four-year 2.75% fixed cash ISA (min £5,940 - no transfers). You can withdraw by closing the account any time, and the penalty for doing so is a relatively low 120 days' interest. So close it after a year and you'd still effectively have got 1.85%, beating most easy-access deals. After two years, it's 2.3%, beating the best two-year fix; after two years, 2.45%. It will allow you top up to £15,000 in July too.
Get 5% interest on your ISA money now?
While ISA rates are higher than normal top savings rates, some bank accounts have launched rates as high as 5% to persuade you to switch to them. So another question being flung at me is "Should I use a cash ISA when bank accounts pay more even after tax?"
In a nutshell, cash ISAs give the long-term gain of protecting your money for years to come, bank accounts offer the short-term benefit of a higher rate. Yet there is a way to get the best of both worlds.
- Step 1: Shove cash into a high-interest bank account. Provided the after-tax savings rate beats the ISA you'd chose, put the money into the high-paying bank account. Santander 123 pays 3% before tax on between £3,000 and £20,000, Lloyds Club 4% on £4-£5,000, Nationwide 5% on up to £2,500 and TSB 5% on up to £2,000. Though each has slightly different catches, so read the full info at www.mse.me/bankaccounts before opening them.
- Step 2: Use the cash to open an ISA on 31 March 2015. One week before the tax year ends, just move the cash out of the bank account and open your ISA to fill the allowance. This way you get the short-term higher rate, but you don't lose your ISA allowance.
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