My daughter has a Cash Isa worth £30,000, earning 1% interest. The best fixed-interest rate I can find is 1.65% for two years. Would it make sense for her to take all the money out of her Cash Isa and invest it in NS&I for three years earning 1.95% a year. She would earn extra interest over the term, but lose her Isa status. I would be interested in your views on Isas when you can get better interest in other savings accounts.
This raises the tricky issue of whether a Cash Isa is worth keeping these days, when basic- and higher-rate taxpayers now have the Personal Savings Allowance (PSA).
This PSA was introduced in April 2016 and means that basic-rate taxpayers can earn up to £1,000 a year in savings interest, tax free. The PSA for higher-rate taxpayers is £500 a year (additional-rate taxpayers don’t get a PSA). So, assuming your daughter is a basic-rate taxpayer, and this is all the money she has in savings, she would be better off ditching her Isa and depositing the funds into a normal savings account.
If she is happy to tie the money up for three years, the best Cash Isa available is with Virgin Money and is paying 2%, which would provide £600 tax-free interest per annum. Compare this to the best traditional three-year, fixed-rate bond from Vanquis Bank paying 2.3% gross/ AER, and £30,000 in this account would pay your daughter £690 gross per year. As this is within her personal savings allowance (assuming she is a basic-rate taxpayer), would therefore be tax-free.
It seems like a straightforward decision. However, there are some unknowns that you and your daughter should be mindful of because as you’ve pointed out, if she ditches her Isa now, she loses the past allowances that she had built up so far.
For example, if her circumstances were to change and she became a higher-rate taxpayer, the interest she receives on the Vanquis or NS&I Fixed Rate Bond would be greater than the PSA so there would be some tax to pay on the interest she earns. She can start to use her Isa allowance again once the bond has matured, but she will just have some tax to pay in the meantime.
Another change in circumstance to consider is if she were to receive a windfall, which means she has more money to deposit in cash. This could, again, mean the interest she earns is greater than her PSA, so she could end up paying tax on her savings, which she would otherwise have avoided if she had kept her Isa and used the allowance going forward.
I’m sorry there is no definitive answer, but hopefully this will allow you both to make the best decision based on the information you have.