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Mar 2019

How can the best 1-year Cash ISA work for me?

How can the best 1-year Cash ISA work for me?

It’s your last chance to get some savings locked away in a Cash ISA for this tax year. But you need to act quickly: some providers need to receive online applications by Thursday 21 March, in order to receive any documents they request from you, and your money, by 28 March.

What are the advantages of a Cash ISA?

Interest rates across the board are all historically low, and the savings rates for Cash ISAs aren’t handsome (below 2%). But a Cash ISA can be a useful account to use for at least some of your savings. Why?

The interest you’ll earn

  • Any interest is better than no interest from a zero-interest current account.
  • Rates for a One-Year Cash ISA are better than Easy-Access ISAs.
  • If you’re already have a Lifetime ISA or a Help to Buy ISA, you can put some remaining cash into a One-Year Cash ISA and be able transfer it, or take it out in cash if you need it in 12 months’ time.

It’s flexible

  • After a year you can choose to take your cash out, and keep the interest tax-free.
  • You have more flexibility than with a two or three-year fixed-term ISA (when you may not be allowed to withdraw your cash, or have to pay a penalty if you find you need the cash after just a year).
  • If you haven’t had time to decide your long-term savings strategy, at least this puts some money away in an ISA “wrapper” for the short-term.

You take advantage of the ISA tax break

  • If you’re a big saver you have a £1,000 Personal Savings Allowance (PSA) limit on how much you can earn tax-free in interest on your savings. If you’re a higher-rate taxpayer the limit is £500 earned in interest. But everyone can invest an additional £20,000 a year in ISAs to get more tax-free earnings.
  • Once you have paid into any kind of ISA you can transfer over to any other kind of ISA in later years without it counting as part of your annual ISA pay-in allowance (currently £20,000).
  • £1,000 a year in interest earnings sounds like a lot now, when interest rates are historically low, but if interest rates rise it will be much easier for savers to be bumping up against their PSA tax-free limits, in which case having savings already tucked away in a tax-free wrapper will protect you from future tax.

Cash ISAs are protected

Your choice of ISA products will depend on your financial confidence, how you make your financial decisions, and how much you want to be involved in your money-management. (You’ll find financial risk profile questionnaires online that will help you identify what kind of ISAs you’re comfortable with.)

Putting some money into a Cash ISA may be a useful choice for you if you are:

Risk averse: you’d rather this money was rock-solid safe than possibly at risk but earning more interest

Hands-off: you just want it put this sum of money away, and don’t want to be involved in actively managing it

Thinking short-term: you don’t know if may need access to this money for bills or family commitments in a year’s time

Understand the interest rate

When you’re looking at comparison tables you’ll see interest rates quoted as Gross (the flat amount paid) or AER (Annual Equivalent Rate – interest compounded over a year).

For a fixed-term one-year ISA, they will be the same.

Remember to ditch and switch

If you don’t withdraw your money from your One-Year Cash ISA after a year the account will probably revert to a very low rate, or pay no interest at all.

And other ISAs you took out a few years ago may now be performing very poorly compared with more recent ISA products.

Make a note to review your ISA rates regularly, and transfer your savings over to a higher-performing ISA as soon as you can do so without penalties.

Be sure to get the new fund you’ve selected to transfer your savings over. Don’t cash out of the old account and then pay into a new account or the amount you’re transferring will count as part of your annual ISA pay-in allowance.

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