Why it might be time to ditch cash ISAs
Many of us who have invested in cash Isas will have been taught that it is worth topping them up every year.
However, with interest rates still low and inflation high, the jury is out on whether these products still offer value for money for many savers.
There are 399 cash Isa deals available at present, according to financial data service Moneyfacts. But even though rates have risen slightly, money in a cash Isa won’t keep pace with inflation.
Rachel Springall, Moneyfacts financial expert, feels cash Isa usefulness is now ‘debatable’, as there are better savings rates available outside the Isa wrapper. ‘It wouldn’t be too surprising for savers to consider investing in the stock market for their Isa instead,’ she says.
Anyone with cash Isa savings, or money to tuck away this Isa season, needs to decide on the best course of action in the current market before going for a default cash option. Here are some things you should think about…
Other savings accounts
If you are planning to open a new cash Isa, the first thing to think about is whether you will otherwise pay tax on your savings interest. Most of us have what is known as a Personal Savings Allowance, which means we can earn some interest on our savings without it being subject to tax.
If you are a basic rate taxpayer you will have a £1,000 savings allowance, meaning you could earn £1,000 a year in interest without paying tax. If you are a higher rate taxpayer, you have a £500 savings allowance. Additional rate taxpayers do not have a savings allowance at all, so they pay tax on any interest on their savings.
With savings rates as low as they are, you would require a substantial cash savings pot to have to pay any tax if you have a Personal Savings Allowance. Currently, the top savings rate on an easy access Isa is 0.8% and on a £20,000 cash pot, this would net you interest of £160 a year.
The rules around switching
Whether you choose to switch to another cash Isa or to move your existing money into stocks and shares, it is really important that you follow the switching process properly.
If you transfer an Isa that you have paid into during the current tax year to a new provider, you must transfer the whole balance.
For Isas from previous years, you can choose how much to transfer – so you do not have to transfer it all. All Isa providers have to allow you to transfer money out, but they don’t have to allow you to transfer money in.
When you find one that does – which includes most stocks and shares Isa providers as well as some cash providers – you must apply to transfer the Isa with your new provider.
If you simply withdraw the money yourself and try to transfer it, you will lose the tax advantages, so ensure that you leave this process to the experts.
Isa transfers should take no longer than 15 working days for switching between cash Isas, and 30 calendar days for other types of transfer.
If you find it is taking longer than this, you can raise a complaint with the new provider and if you cannot resolve it satisfactorily in this way, you will have final recourse to the Financial Ombudsman Service.
Adrian Lowery, personal finance expert at wealth managers Tilney, says that while it is ‘essential to have a good cash savings buffer before you think about investing’, it does not need to be in an Isa. ‘There does seem at the moment little point in having a cash Isa,’ he suggests.
‘With non-Isa savings accounts paying a top 0.7% easy access and 1.55% one-year fix, it would seem sensible for most people to use these for their cash savings and leave their Isa allowance for investing, should they decide to.’
He also points out that you can split your annual allowance between cash and stocks and shares Isas, so you do not have to put it all in one place if you aren’t comfortable taking a risk with your whole pot.
Top cash rates for your previous Isas
If you have a large pot of money in cash Isas at present, it may well be on a very low rate, even if the account was market-leading when you took it out.
You can switch your older cash Isas to any provider that allows ‘transfers in’, which at least means you could get the highest possible interest rate for your money.
You can get better rates if you are willing to lock away your money for longer. For example, Al Rayan Bank offers a 2% rate if you are not planning to touch your money for three years. Many top accounts, including Marcus’s 0.7% easy access Isa, do not allow transfers in.
However, Yorkshire Building Society, which pays 0.6% on pots up to £10,000, 0.7% on £20,000-plus and 0.82% on £50,000-plus, does allow transfers in.
Switching your cash Isas to investment Isas
If you are happy to take a little more risk with your money, you could consider switching your cash Isas into investment products.
The upside of stocks and shares Isas is that your money could grow more over the long term, but of course you have to deal with the inevitable ups and downs of the stock market.
Sarah Coles, at DIY investment platform Hargreaves Lansdown, says its internal figures suggest more people than ever moved money from their cash Isas to stocks and shares last year.
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