Cash ISAs

Cash ISAs 2021

After the Bank of England cut UK interest rates following on from the 2008 financial crisis, they have remained at extremely low levels ever since.

The European credit crisis, huge public borrowing and more recently Brexit and COVID-19 have all put pressure on central banks to keep interest rates close to zero.

Indeed, the amount of global debt issuance by investment grade companies paying negative interest rate hit just over 17 trillion USD recently – a new record - although perhaps not one to shout from the rooftops about!

So what kind of returns can I expect on cash ISAs going forward?

The chart below from the BOE gives you a good visual aid on current cash return prospects.

"Looking at this graph
 if you are looking to invest for the longer term you have to question the logic of putting money into a standard cash ISA".

Oliver Roylance-Smith, Head of investment & savings.

UK savers who keep money in long term savings accounts or Cash ISAs where returns are historically lower on fixed rate products will be doing very well to keep their money's buying power ahead of inflation.

"Are you one of the 8.5 million adults that subscribed more than £44 billion into Cash ISAs in the last tax year, or maybe you’re part of the £268 billion currently held in Cash ISAs?

Either way, its possible that you are receiving record low returns, with market leading interest rates only offering around 1.0% to 1.10% AER on 3 to 5 year fixed rate ISAs at the moment. So are there any other options to consider?"

Needless to say, investors are left scratching their heads in how to earn any meaningful yield on their money.

3. Alternative Options To Consider

1. Cash ISA Deposit Plan

If you’re prepared to forego a fixed return, MB’s popular Kick Out Deposit Plan, offers the same capital protection as any other bank deposit, but will pay 2% for each year (not compounded), provided the FTSE 100 Index at the end of each year from year 4 onwards, is 5% higher than its value at the start of the plan (subject to averaging).

That’s a potential 8% after 4 years, 10% after 5 years, etc.

Since the plan is also available as a Cash ISA, and accepts ISA transfers, if you’re thinking what else is there that could release greater potential from your cash, this is an option.

The downside is that the return is not guaranteed, so you could receive only your initial capital back.

More information »

2. Active Savings

Lets face it the best fixed cash ISA rates are not as competitive as the best non cash fixed ISA rates.

One of the challenges with cash is that rates are changing all the time and you need to be proactive in moving money when rates fall.

If you are looking for better returns on your cash (money held outside an ISA) & keeping your money in an ISA is less important than earning a top UK interest rate then...

The good news is that there is a new service offered by  Hargreaves Lansdown called "Active Savings" where you no longer have the hassle of opening, closing and transferring your savings between different banks and building societies.

Once your account is open, you can pick and mix savings products from a range of banks and building societies, without ever having to fill in another form. 

There are a range of products and terms to choose from, and you can have as many as you like.

With Active Savings there are a host of measures in place to help protect your cash. From Financial Services Compensation Scheme protection, to online encryption technology.

More information »

3. Stocks and Shares ISAs

If you are undecided on whether to go for a cash or stocks and shares ISA a key consideration is interest rates. 

"Right now interest rates
are about as low as they can get!"

With cash ISA provider instant access and fixed rate products offering sub 1% rates at the time of writing the challenge over time is that the buying power of your money will deteriorate due to inflation. As at July 2020 the Retail Price Index figure was measured at 1.6%.

The average 1 year fixed rate as at September 2020 was 0.44% (Source: Bank of England).

In real terms the average account holder in a 1 year fixed rate bond is losing money in real terms.

If you want to tackle inflation and you are happy to lock your money away for 5 plus years then you should seriously consider a stocks and shares ISA.

Hargreaves Lansdown have produced a useful guide if you are thinking of investing in an stocks and shares ISA.

Get FREE Guide »

Alternatively have a look at the different  investment ISA platforms available which allow you to set up an account and then you can decide what you want to invest in.

If you prefer you can opt for a service where the investing is done for you based on different risk profiles. E.g. Both  Legal and General and Fidelity offer a ISA stocks and shares service where you can leave the investing to them.

Important information - please keep in mind that the value of investments can fall as well as rise, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

What is a cash ISA?

A cash Individual Savings Account (ISA) is a tax-free savings account which allows you to save up to a set amount of money per financial year without paying any tax on it,  you can check the current cash ISA limit by clicking here. You need to be a UK resident or Crown employee aged 16 or over to open an account. You can only have one cash ISA per tax year, but you can also have a different type of ISA, known as a  stocks and shares ISA, simultaneously.

Benefits of a cash ISA

There are three key benefits to a cash ISA:

1. No income tax - you don't pay tax on any interest you earn from the cash in your ISA.
2. Easy access - if you choose an instant access cash ISA (rather than a fixed-rate cash ISA) it's a convenient way to save at a good interest rate while retaining fast and easy access to your money, should you need it.
3. Easy transfers - if you find an ISA provider that offers a better deal than your current provider, you can transfer your cash ISA to them.

How much tax can I save with a cash ISA?

The good news is that whatever your tax bracket, you'll pay 0% tax on any savings held in a cash ISA. Compare this to the usual tax rates on savings:

If you're a basic rate taxpayer...
you would usually pay 20% tax on interest earned from savings.

If you're a higher rate taxpayer...
you would usually pay 40% tax on interest earned from savings.

If you pay tax at the additional higher rate...
you would usually pay 50% tax on interest earned from savings.

If you pay the 'savings rate' of tax for savings...
you would usually pay 10% tax on interest earned from savings.

Using your cash ISA allowance can therefore save you money by allowing you to keep 100% of any interest you earn.

The above information gives you a general idea of what you could save - remember that it depends on your individual circumstances and may be subject to change in the future.

Can I transfer a cash ISA?

It depends on your circumstances. If you've got some money saved as a lump sum from a previous tax year, you'll usually be permitted to transfer this from one cash ISA to another, or to a stocks and shares ISA. This transfer shouldn't affect your ISA investment allowance for the current tax year.

Which type of cash ISA is right for me?

An instant access cash ISA might be the right choice for you if...

1. You want a good rate of interest, plus the ability to get hold of your money quickly if necessary.
2. You want to take advantage of your annual tax-free savings allowance but only have a small amount to deposit - instant access ISAs can be opened from as little as £1.
3. You want to be paid regular interest - instant access ISAs usually offer monthly or quarterly interest.

A fixed-rate cash ISA might be right for you if...

1. You are happy to put your money aside for a set period of time - this usually allows you to accrue a higher rate of interest than you might get with an instant access cash ISA.
2. You want to take advantage of your tax-free savings allowance and have a lump sum to deposit - many fixed-rate cash ISAs require an initial deposit of around £1000.

Use our services to help you choose

Like any investment option or financial service, it's important to research your options before committing to a cash ISA. You might find our services useful for:

Comparing cash ISAs, including instant access ISAs and fixed-rate ISAs

Comparing cash ISAs with other savings options

Top tips for making the most of your cash ISA

1. You can only have one type of cash ISA in each financial year, so research your options carefully. Whether you choose a fixed-rate or instant access cash ISA, give some thought to your savings goals beforehand to help you determine what's right for you.
2. Remember that you can't carry your tax-free allowance over from one financial year to the next - so if you've got enough cash to hit your limit, stash it in an ISA.
3. Because a cash ISA operates on a year-long basis, it's a good way to try your hand at saving without committing yourself to anything long-term. It's also a great way to save for a specific event like a wedding, holiday, or starting a family.
4. Once you've set up your cash ISA, make sure you still keep an eye on the interest rates available from other providers. You can usually switch cash ISA providers without incurring any charge.
5. To make life easier, set up a direct transfer from your current account into your cash ISA to make sure that you put aside a certain amount each month without fail.
6. Don't forget that you've got the option of opening a stocks and shares ISA, too. For more on this, see our page on stocks and shares ISAs.