Essential Guide to Finding the Perfect Cash ISA
Think of a Cash ISA as simply a savings account that you hold with a bank or building society – in the traditional way, you will pay interest on the amount you save, but unlike other savings accounts, this interest has a yearly tax-free allowance.
This ISA allowance is why Cash ISA’s are a much better option than normal savings accounts. You can end up keeping 20% – 40% of the funds that you would have lost through interest.
In addition, Cash ISA’s are highly flexible, meaning regardless of whether you are saving for the long term or to buy a car in the near future, you can access your funds without any fuss.
The following guide offers easy explanations and advice to help you find the best Cash ISA deal for your nest egg.
The Way Cash ISA’s Work
This year has seen the government increasing the tax-free allowances for all ISA’s. In the case of a Cash ISA, you can pay up to the maximum limit of £5,340 in any one tax year (running from the April to April) without paying interest.
Generally, the minimum amount you can invest in a Cash ISA is £10, meaning anyone, regardless of their income bracket, can invest and save using them. While those on a higher tax band will notice more savings benefits than others, ISA’s are just as easy to open as any savings account, so there really is no reason not to have one for your savings.
There is one glitch however – once you withdraw money from a Cash ISA, it cannot be replaced later in that tax year. So, to really reap the rewards from your tax-free allowance, it’s best to keep your money tucked away over a longer period of time.
In addition to depositing cash into bank and building society accounts, you can also place the following into a Cash ISA:
· National savings and investments products that are specially designed for ISA’s.
· Life insurance policies (some fail to meet the qualifying conditions for Stocks & Shares ISA’s but are accepted in Cash ISA’s).
· Alternative financial arrangements, such as Sharia compliant products.
Types of Cash ISA’s
Instant Access
This is the simplest form of Cash ISA. It is virtually identical to traditional savings accounts apart from the tax-free allowance on your interest, and some providers even offer Cashpoint cards to make them even more convenient. These types have a variable interest rate, meaning they will fluctuate to match the official interest rates set by the Bank of England.
Fixed Rate
With this kind of Cash ISA, the interest rate is fixed in most cases for 6 months to 3 years. While this offers a better interest rate deal, it will not be suitable to you if you want to have instant access to your cash whenever you choose, since if you did want to take your money out before the fixed term, you can expect in most cases to pay a hefty penalty fee, sometimes costing over 50% of the total interest.
How to Choose the Most Suitable Cash ISA
The two most important rules for finding the right Cash ISA for your needs are to look for the best interest rates on the marketplace and also to be clear on the level of flexibility you will need i.e. there’s no point gunning for the best interest rate (which is usually offered on fixed rate deals) if you’ll also want instant access to your funds.
Bear in mind that in addition to mind the early payment penalty fees attached to fixed rate deals, some Cash ISA’s require you to give a certain number of days notice, usually 30, 90 or 180, before you can withdraw your money.
Thus, it’s a good idea to lock your money into a Fixed Rate Cash ISA bond only if you have instant access to other savings resources. If your Cash ISA savings will be your only savings, it’s wise to opt for the best paying instant access account, since you never know when you might need the cash to hand.
Another option is to put a portion of your funds, say 50%, into an instant access ISA, and the rest into a fixed notice account which offers a good interest rate.
Lastly, it must be said that ISA’s deliver the most advantages from their tax-free allowance if you think of them as a long term investment.
Conclusion
In effect, the best ISA deals will depend largely on your individual financial circumstances. The main benefit however of Cash ISA’s over their Stock & Shares counterparts is that they can offer you the flexibility and control to structure your savings in a way that most suits to your needs.
About the Author: George Pardew is an independent advisor on best ISA deals.
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