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Five questions to consider before opening a cash ISA

Joanna Faith
Written By:
Joanna Faith

You have just a few weeks left to use up your annual ISA allowance before it’s gone for good. If you’re planning to open a cash ISA for the first time, here are a few things to think about…

Each tax year – 6 April to the following 5 April – all adults are given an ISA allowance, which is the maximum amount of money you can contribute into an ISA. This year, the allowance is £20,000.

You can split your allowance between cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs.

If you’re planning to open a cash ISA, the interest rate you get is, without a doubt, important. However, it shouldn’t be your only consideration.

Here are a few questions to consider before choosing an account.

Why are you saving?

The first thing you need to think about is what the money you’re saving is for. If it’s your emergency pot, you don’t want to lock it away. Instead, you’ll want it in an easy access account, which lets you get your hands on it immediately.

If it’s for a more medium- or long-term goal, you could consider locking it away in a fixed term ISA, which will typically offer you a higher rate.

Is easy access really easy access?

Some of the most competitive easy access deals on the market in fact limit the number of withdrawals you can make so read the small print first.

You don’t want to get caught out if you need your cash urgently but can’t get hold of it.

Is the ISA flexible?

Flexible ISAs allow you to withdraw and replace money without the replacement counting towards your current year’s allowance.

This could be important if you think you’re going to want to dip into your savings at some point and then top them back up.

Most, but not all, ISAs are flexible so check before you commit your cash.

Is the rate variable or fixed?

Some ISAs pay a variable rate, which means the rate can change at any point. If you go for a variable rate, you’ll need to keep a close eye on it and switch to a better deal if the rate falls. Your provider will have to tell you in advance if your rate is being cut.

Fixed rate ISAs, which generally pay higher rates than variable rate ISAs, offer you certainty that the rate won’t change for the period you agree to lock your money away for. Just bear in mind if interest rates go up, you could be getting a better deal elsewhere.

Is interest paid monthly or annually?

Some ISAs will pay interest monthly and some will pay annually. If you’re planning to use the interest as a way of supplementing your income, it’s worth going for monthly interest. (Read our guide to monthly vs. annual income here.)

Some providers will also insist that interest is paid into another account, some will stipulate that it’s paid back into the ISA to help it grow, while others will give you the choice. Make sure you know how your chosen ISA works.