Are Cash ISAs worthwhile?
|Saving | Cash ISAs
Asked by roykm, submitted
22 December 2009.
I can't see the reason to invest in an ISA as I feel fixed rate income bonds are better value even though I have to tie the money up. I also think ISAs have too many clauses to get a good rate. Have I got it right?
Answered by Justin on 22 December 2009
There are two issues here. Are individual savings account (ISA) tax benefits worthwhile for you? And is the savings account held within a cash ISA an attractive proposition?
Let’s start with tax. Cash ISAs are appealing to taxpayers because interest is tax-free. For example, a cash ISA paying 3% a year is worth the equivalent of 3.75% before tax for a basic rate (20%) taxpayer and 5% for a higher rate (40%) taxpayer. The tax-free benefit is for life making it potentially very valuable...unless a future government changes the rules.
Cash ISA interest can also be useful for those aged 65 and over who benefit from an increased age-related income tax allowance. ISA interest doesn’t have to be entered on a tax return hence doesn’t affect this allowance.
There’s usually a good range of savings accounts available within cash ISAs, e.g. easy access and notice accounts as well as 1-5 year fixed rate bonds, which should cater for most needs.
So, provided you’re not a non-taxpayer then you should save tax by holding savings within a cash ISA. But will you enjoy a better rate after any tax benefits?
To find out I’ve compared a few current ‘best buys’ for £1,000 of savings:
|Account Type||Easy Access||1 year Fixed||3 year Fixed||5 year Fixed|
|Cash ISA||2.65% (Standard Life)||3.33% (Bank of Cyprus)||4.00% (Nationwide)||4.55% (Birmingham Midshires)|
|Conventional||3.00% (Alliance & Leicester)||3.75% (State Bank of India)||4.70% (ICICI)||5.15% (State Bank of India)|
|ISA equivalent for|
basic rate taxpayer
|ISA equivalent for|
higher rate taxpayer
As you can see, despite the headline interest rates offered by cash ISAs being lower than ‘best buy’ conventional accounts, taxpayers should end up better off.
Guaranteed Income Bonds (GIBs), offered by a few insurers, used to sometimes offer a worthwhile alternative to fixed rate savings accounts. However, the rates offered are currently awful so no point comparing.
There are seldom clauses or catches on a cash ISAs that wouldn’t otherwise apply to a similar conventional account, so I wouldn’t let worries about this put you off. The main ISA specific restrictions are the amount you can save (£3,600 this tax year or £5,100 if you’re over 50) and withdrawals effectively losing that part of the allowance forever.
Unless you’re a non-taxpayer I think a cash ISA could be a worthwhile home for your savings.
You can read more about cash ISAs on our savings cash ISAs page.
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