How Can a 1 Year Cash ISA Help Me?
Holding a cash reserve which also maximises your tax-free yearly allowance, is a good idea for any saver. Putting your cash in a 1-year ISA structure gives you flexibility and tax-free interest earnings – with the option of transfer to higher-earning ISA options at the end of your term.
The end of the tax year is approaching – the clock is ticking on your ability to use your tax allowance for tax year 2019/2020. The use it or lose it nature of the tax allowance means if you are a saver looking to gain interest, you should be looking at opening ISA accounts if you haven’t already.
Cash ISA interest rates are currently very low (below 2%) so at first glance they might not seem like the most attractive option.
But a Cash ISA is still a useful account for at least some of your savings. We’ve broken down a few key reasons why you should consider a Cash ISA.
The interest benefits:
- Any interest is better a zero-interest current account.
- The interest rates available from a Cash ISA are better than Easy Access ISAs
- If you’re already have a Lifetime ISA or a Help to Buy ISA, you can transfer some of your money into a one-year cash ISA, meaning you can have access to that cash in a year.
- At the end of the term you can take your cash out of the ISA, along with the tax-free interest it’s gained
- The one-year term gives you more flexibility than offered by a 2 or 3 year term.
- It gives you the flexibility to move your money after one year if you have not yet decided what your long-term savings goals are. You can still gain interest without locking your money away in the longer-term options like a Lifetime ISA.
Use your tax-free allowance
- If you have money you want to save and gain interest on, but no specific plan as to how to use it, it’s wise to put it in a Cash ISA before the end of the tax year.
- With your yearly allowance, it’s use it or lose it – and money in a Cash ISA gaining small amounts of interest is of more value than money in a zero-interest current account.
- 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).
Cash ISAs might be right for you if you are…
- Risk averse: you’d rather your money was gaining a smaller amount of interest, but completely safe, than investing it with a higher interest rate but in a riskier account
- Hands-off: you don’t want to be actively involved in managing your account, but want to know your money is tucked away and gaining interest
- Thinking short-term: you know you might need the money in the not-too-distant future, so having access to this money in a year’s time is appealing
Our Top Tip: Remember to Switch
- If you don’t withdraw your money from a 1 Year ISA after the year-long term, the account will most likely revert to a really low rate of interest (or none at all!).
- Keep track of your ISA accounts and the latest rates to make sure you are getting the best possible deal, then 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.