What should I do with £15,000 in a poorly paying cash Isa?

18 November 2016

Q

The balance is £22,000, but I plan to spend £7,000 on a car and a lump-sum mortgage overpayment.

The remaining money will be split into a slush fund for me and my partner, and a sink fund for other emergencies, which doesn’t need to be as accessible.

From
NT/York

A

The good news is that you have a lot of choice regarding what you do next. If this is all the cash you have, you may not need to restrict yourself to a cash Isa to enjoy tax-free interest.

The introduction of the personal savings allowance (PSA) in April this year means basic-rate taxpayers can earn up to £1,000 of savings interest tax-free – the higher-rate taxpayer’s allowance is lower at £500, and additional-rate taxpayers do not benefit at all from the PSA. However, if you cash in your Isa, you will lose the allowance.

If you want to retain your Isa allowance, the rule is that any new funds deposited since 6 April 2016, and therefore using the current tax year’s allowance, must be transferred in one go. But if your Isa is from deposits made in previous tax years, you are generally allowed to do partial transfers, although not all providers will allow this.

 

Assuming your current provider does allow partial transfers, you could transfer all the funds you might need easy access to into the best-paying easy-access Isa, currently Kent Reliance Easy Access Isa Issue 14, which pays 1%.

The remainder could be tied up in a fixed-rate Isa, although the rates on offer are not much higher, see the table below for more details. 

 

If you’d prefer not to transfer to another cash Isa, you can simply cash your Isa in and open normal savings accounts. But you could get a better rate in an Isa, as the best non-Isa easy-access accounts won’t beat 1%.

Click on the table below to enlarge:

Fixed-rate bonds, however, pay a bit more.The best one-year account, with Atom Bank, offers 1.4%. Over the longer term, you can get up to 1.63% over three years and up to 2.01% fixed for five years.

You may wish to open a combination of a cash Isa and standard savings accounts. The secret is to do your research and choose the best rates you can, but with the access you need.