‘Should I move my lower paying cash ISA to a top fixed savings deal?’
Sharia-compliant Gatehouse Bank has launched a one-year fixed-term savings account this week paying 2%, pushing it to the top of the best buy tables.
The top paying ISA equivalents from Bank of Cyprus UK and Al Rayan Bank offer just 1.51%.
Given the difference, savers may be wondering whether it’s worth moving their money out of a cash ISA into one of the top non-ISA deals.
Tax-free to tax environment
It’s important to remember that any money and gains in an ISA is tax-free and you can contribute up to £20,000 this tax year.
Any income earned on savings in non-ISA products is tax-free up to £1,000 (for basic rate taxpayers) and £500 (for higher rate taxpayers) under the Personal Savings Allowance (PSA) rules. Additional rate taxpayers do not have a PSA.
So there’s no blanket answer whether savers should ditch their cash ISA if they can earn more on a standard savings account.
Anna Bowes, director of Savings Champion, says: “It depends on many factors, some of which we can’t answer as it depends on what happens in the future – will ISA rates continue to improve and therefore become a better deal again? Will the PSA remain in the future? Will you receive some unexpected funds which means you are paying more tax on your savings than you would had you kept utilising your cash ISA allowance each year?
“When moving from a tax-free account into a potentially taxable one, you need to realise that as a whole, once you cash in your ISA, you’ll lose the tax-free wrapper on that money for good – so if your circumstances change, you could end up paying more tax on your savings than you need to.”
Bowes adds that once you’ve made the decision, as with any savings account, you are bound by the terms and conditions, so if you need to give notice in order to release the funds, there is always the possibility that the best buy account you were considering is sold out.
As we’ve seen in recent months, savers often need to act quickly to snap up a best buy deal before they become oversubscribed and close to new applicants, or the terms are changed and become less attractive.
“Depending on the type of account, you may be able to make a minimum payment to open the account and top up at a later stage. This is normally an option with easy access and notice accounts, but fixed-term accounts will often accept just one deposit. But even if you can make multiple deposits, the total will need to be paid within a specific period from when the account is opened – usually 14 or 30 days,” Bowes adds.
Unlike transferring an ISA to another ISA, moving money from an ISA to a cash savings account doesn’t require any special transfer forms.
Rates on the up
While there is a gap between some of the best buy standard accounts and cash ISAs, Bowes says best buy ISA rates have been on the rise over the last year.
“In some areas there is now little between the best buy cash ISA and the standard equivalent. In fact, currently you can get a better rate on an easy access cash ISA with Al Rayan Bank than you can on a standard savings account. The Al Rayan easy access cash ISA is paying 1.35% (expected profit rate), whereas Bank of Cyprus UK has the best standard easy access account paying 1.32%.
“But there are less competitive cash ISAs to choose from on the whole, so you have to pick carefully,” she warns.
Bowes adds that savers may be languishing in “dreadful accounts” that can be improved upon, so it makes sense to regularly check the rate they’re earning and how much more they can make by switching to a competitor.
In recent times, competitors such as Sharia-compliant banks have come out with some of the very best rates to entice savers.
These banks pay an expected profit rate rather than a guaranteed interest rate so this removes the element of certainty for savers. But as far as Savings Champion is aware, the key players in the Sharia savings market have historically paid the expected profit rate.
“We would hope this indicates they are careful when planning the expected rates they offer. Plus, they normally state you can take funds away early, including all profit earned to date, if the expected profit rate is not likely to be met.
“The new account from Gatehouse is market-leading, and as a result could be very popular, so it’s best to take advantage as soon as possible. Of course, the savings market could react and therefore we may see similar or even better options in the future, but the opposite may be true, so it’s better to act on the information you have,” Bowes says.
Is the flexible ISA more flexible?
Flexible ISAs allow you to take money out of the product without it impacting your overall allowance. For example, the current annual ISA allowance stands at £20,000. With a flexible ISA you can put £20,000 in one tax year, then withdraw £10,000 and then put the amount back in without the replacement forming part of the overall allowance. With standard ISA accounts, the £10,000 couldn’t be replaced as you’re viewed as having already fully funded your ISA for the tax year.
Flexible ISA savers have an “interesting opportunity”, according to Bowes, albeit only within a short window.
“While this may sound like a great idea to allow savers to move their ISA funds to a normal better paying account for a period of time, if you do this, you must make sure you replace the funds within the deadline (end of the tax year) otherwise you will have lost the ISA wrapper on that money for good. It’s probably therefore more sensible to simply use the flexible option if you need to use the funds for an urgent purpose,” she says.
Related: See YourMoney.com’s ‘Is it still worth saving money in a cash ISA?’ and Five reasons why cash ISAs are still relevant for savers for more information.