Cash ISAs: Pros and Cons
A Cash ISA is your first port-of-call when it comes to opening a new ISA; they can be a great way for you to learn the ropes of how ISAs work before branching out into higher risk options. What are the pros and cons of Cash ISAs themselves?
What is a Cash ISA?
An ISA (an individual savings account) is an savings account with a tax-free wrapper, meaning your returns from interest on a Cash ISA are protected from the taxman.
You can deposit up to £20,000 for tax year 2019/2020 in any ISA account as long as you don’t open more than one type each tax year.
Unlike a Cash Savings Account, there is no cap on the tax-free interest you can earn – so if you’re interested in tax-free interest, an ISA is the way to go.
There are various different kinds of Cash ISA which can suit different individuals, including:
What are the pros of a Cash ISA?
Cash ISAs are often seen as a 'lesser' ISA accounts because they do not have very high interest rates - especially when compared to the other kinds of ISAs on offer.
A Cash ISA might be a good idea for you if:
- You haven’t opened any Cash ISAs this year
- You want to earn interest but know you’ll need access to your cash
- You want to save and know you won’t need the funds for a fixed amount of time
- You’ve already used your tax savings allowance on a Cash Savings Account
- You want tax-free returns, but don’t want to put more of your money into a Stocks and Shares ISA.
- You want tax-free returns, but don’t want the risk of putting your money into a Stocks and Shares ISA.
What are the cons of a Cash ISA?
The main disadvantage of a Cash ISA is that - to be completely blunt - that the interest rates on Cash ISAs are not great.
You can earn interest tax free, but you might not be earning very much of it.
This has put some people off Cash ISAs as an account – especially as you can earn up to £1000 without tax in a Cash Savings Account as an alternative.