Experts warn savers not to ignore Cash Isas

Published by Sylvia Morris on 17 April 2018.
Last updated on 17 April 2018

Experts warn savers not to ignore Cash Isas

In early April, we ushered in a new tax year and with it the chance to put more money into cash Isas. They used to be simple – a choice of an easy-access or fixed rate savings account where your cash Isa allowance earned tax-free interest. 

Then politicians muddied the waters with a string of variations on this popular account. Now savers have to wrestle with more complex terms and conditions, and more rules from the taxman. 

Then there is the flexible Isa – basically a normal Cash Isa with a twist. This lets you take money out and replace it in the same tax year without the move counting towards your annual Cash Isa allowance. You can put in the full £20,000, take out £5,000 and replace it in the same tax year without busting your allowance. 

Next is the so-called portfolio Isa, where you can split your cash Isa allowance between a fixed rate and easy-access account. With most providers, this breaks the Cash Isa rule which says you can only open one each tax year. But with a handful of providers including Ford Money, Nationwide Building Society and Newcastle Building Society, your fixed-rate and easy-access money sit side by side in the same Isa rather than being split over two. 

The inheritance Isa is available to widows, widowers and civil partners who have lost their spouse or partner since 3 December 2014. It’s essentially an extra Isa allowance on top of the usual £20,000, equal to the value of your partner’s Isa at the date of death. Some providers accept this extra allowance into their basic Cash Isas, others offer separate accounts. 

Years of rock-bottom rates and the arrival of the personal savings allowance has taken the sparkle off cash Isas. The personal savings allowance, introduced two years ago, means you can earn £1,000 in a taxable savings account without facing a tax bill as a basic-rate payer or £500 as a higher-rate payer. For example, you can have over £50,000 in the top-paying, one-year bonds at 1.8% without busting the £1,000 figure. 

But although rates remain poor, experts warn against ignoring Cash Isas.  Keeping money in standard accounts could leave you with a tax bill down the line.

Carol Knight, chief operations officer at trade body Tisa, which promotes tax-free savings and investments, says: “At some point, interest rates will rise as the economy is cyclical. Cash Isas give more protection against future tax bills and take away the worries of changes in the personal savings allowance or when you might breach it.”

Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere, adds: “There is no guarantee the personal savings allowance will last. Even if it does, it could be cut in future years in the same way as the dividend allowance, which fell from £5,000 to £2,000 in April.”

This article first appeared on our sister website Money Observer.

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It's a two way street, banks

It's a two way street, banks need to entice savers with decent rates.

A cash ISA is a joke that stopped being funny years ago, no matter what the experts say.

The problem in recent years

The problem in recent years is that Banks do not need savers' cash - the Bank of England has been flooding the system with cheap cash ('Quantitative Easing' and 'Funds For Lending'). If Banks are awash with all this (imaginary money) extra liquidity, they really do not need the real money of savers' cash. This is why savings rates have fallen over and over again while the Base Rate remained steady. Until the Bank of England stops these inflationary measures, there is no prospect of cash savers getting a fair deal.

While interest rates remain

While interest rates remain ruinously low, there is no point in putting money away somewhere that it will be worth less in future than it is now. There have been forecasts of rate rises for a few years now, but while HM Treasury still needs to finance its ever-growing debt mountain, I have given up waiting. Clearly the Bank of England MPC are being compelled to set aside their primary task of controlling inflation via interest rate policy. Instead, the BoE and its biggest debtor HM Treasury are robbing cash savers to finance budget deficits and there is no sign that this will end whie government lacks the spinal fortitude to insist that spending must be financed by taxation.

It makes sense for the

It makes sense for the wealthier savers to still put money into Cash ISAs to hedge against increasing tax rates, possible future governments reducing or removing tax free allowances, or just having enough saved up to exceed the threshold. For those of us who aren't so well off and whose total savings don't even add up to the annual allowance it's pointless for now and if the tax situation changes we can always just move the whole lot into a Cash ISA (assuming it's not all locked away in a long term fix).