Five reasons to allocate to a cash ISA
There’s no denying the savings environment remains tough. The low interest rate environment we find ourselves in today, mixed with ongoing economic and political uncertainty has caused savers to come to the conclusion that putting away their hard-earned cash for a long period of time just isn’t worth it.
I want to dispel that myth because cash ISAs are vital for shielding your cash against tax and have become even more important if your personal savings allowance (PSA) reduces. They have a wealth of benefits and should be on savers’ radars in the run-up to tax year end, particularly for the highest rate taxpayers and those with a sizeable savings pot. Here’s why:
- Your PSA could change
Basic-rate tax payers – those earning £12,501-£50,000 in the 2019/20 tax year will receive a Personal Savings Allowance of £1,000. This means they can earn up to £1,000 in interest tax-free on their savings. It’s important to remember, however, that if you receive a pay rise in the future which pushes you up a tax bracket, your PSA will reduce. Higher-rate tax payers – those earning £50,001-£150,000 in the same tax year – receive £500 in personal allowance, and highest-rate tax payers – those earning over £150,000 – do not receive a PSA at all. So this last group, in particular, can benefit from the ISA wrapper, as well as people who have already maxed out their PSA in a standard savings account.
No-one has a crystal ball when it comes to predicting future rate rises or falls, but it’s also worth remembering that rising interest rates will make your PSA less attractive over time, as your allowance won’t stretch as far.
- Compounding is king
One of the greatest things about the cash ISA is how beneficial they are over the longer term, especially if you have a larger savings pot. If you continue to hold money within your cash ISA year-on-year, you’ll profit from compound interest. This means you’ll earn interest on interest already earned, taking advantage of the fact the capital increases over time. If you decide to use your allowance each tax year, the sums in your ISA can grow rapidly as a result of this.
- Take advantage of the flexibility
Savers were previously only able to open one ISA product each tax year, but things are different now. People have the option to open various ISAs in one tax year, using the ISA allowance across a range of products.
Aldermore’s research has revealed that 62% savers still only use one ISA product to save, but 66% want their main savings bank to launch an ISA portfolio manager to make the process of handling multiple ISAs easier.
A portfolio ISA allows customers to open numerous cash ISA accounts up to the £20,000 allowance. This means they can maximise their returns, suit their savings objectives by capitalising on the different ISA products on offer, and still have easy access to a portion of their cash. For example, you could choose to save into a combination of fixed and variable rate ISAs, or even a Help to Buy ISA.
You can also withdraw and reinvest the funds in the same tax year without affecting your annual contribution allowance.
- It makes sense to shop around
Don’t forget that ISA transfers don’t count as paying in. If you spot a better rate elsewhere, you can make a transfer whenever you like. You can even transfer previous years’ ISA savings to another account with a more competitive rate and open a new one for the current tax year at the same time.
- The tax-efficiency benefits live on
The tax benefits of your ISA won’t ever get lost. Unlike with other savings products, spouses and civil partners are able to pass on their ISA savings and retain their tax-friendly status in the event of death.
Cash ISAs might not be relevant for everyone, but for those who would like to consider them there are a variety of products available. Everyone’s financial situation is different, so I’d encourage people to explore the different products on the market to work out which ISA, or combinations of ISAs, is the most suitable for your needs.
Ewan Edwards is head of savings at Aldermore