might a Cash ISA be for you?
A Cash ISA is for you if:
- you want to earn tax-free interest on your cash savings
- you are a UK resident
- you have not already used up your Cash ISA limit – you can currently save £5,640 per year (the total limit for cash and stocks and shares ISAs is £11,280)
- you are aged 16 or over (junior ISAs are also available)
How they work
- You’ll earn tax-free interest on your savings.
- You can only open one Cash ISA per year, but it is possible to transfer to another provider.
- If you withdraw money from your Cash ISA, you don’t reset your annual limit. For example, say in one year you saved up to the Cash ISA limit before withdrawing £1,000. You cannot top up that £1,000 immediately – you’ll need to wait for the next tax year.
Cash ISA transfers – the rules
- If you want to change providers – for example if you find another ISA that is offering a better interest rate – both old and new providers need to agree to the transfer. You can ask the new provider to sort this out for you.
- Although your current provider is required to enable you to transfer your ISA out of their account, not all providers accept transfers in to new accounts, so check when you ask about opening the new account.
- Your current provider may charge a penalty for transferring. Check for any fees or charges to make sure transferring is still worthwhile.
- You can transfer your current Cash ISA, as well as your Cash ISAs from previous years. Cash ISAs from previous tax years can be split – with some money going to one provider and the rest to others. However, the full amount of an ISA you have contributed to during the current tax year must be transferred to the new provider.
- If you decide you’d rather put your cash into shares, you can transfer the entire balance of your current tax year’s Cash ISA into a stocks and shares ISA. For previous years’ Cash ISAs, you can transfer all or just part of your savings into a stocks and shares ISA.
Risk and return
- Your original savings are protected.
- You won’t need to pay any tax on the interest you earn. But be aware that if you are a 16 or 17 year-old and the money in your ISA was a gift from a parent, they might have a tax bill under the parental tax settlement rules. For information about the parental tax settlement rules, visit the HM Revenue & Customs website.
- Not all Cash ISAs offer great interest rates. Shop around until you find a good deal.
- Beware of teaser rates that are high for a short period of time before dropping off to a low level. If you find that you’re no longer earning a competitive interest rate, look for a higher rate ISA to transfer into.
- Beware of fixed-term cash ISAs offering very high interest rates. In these structured deposits you are taking a gamble on the performance of an index or commodity price. You may get no income or capital growth, and charges may be deducted from your capital.
- Many Cash ISAs are instant access accounts paying a variable interest rate. But Savings Bonds offering a fixed rate over a fixed term can also be Cash ISAs (with your money being paid into an instant access account once the bond matures). Don’t tie your money up unless you can afford to.
- Some fixed-term Cash ISAs are ‘structured deposits’. With these, you are taking a gamble because the interest you get depends on the performance of a stock-market index. You may get no interest at all if the stock-market falls. However, with structured deposits, your original savings are protected – this is not the case with structured investment products, so do not confuse the two.
Access to your money
- With instant access Cash ISAs you can withdraw money when you want to.
- With fixed-term Cash ISAs, you’ll get your money back at the end of the period you signed up for – the term. Some accounts allow early withdrawals, but there may be a penalty.
- If you withdraw early from a fixed-term account, there may be charges.
- Your provider may charge penalties and fees if you transfer your Cash ISA to another provider.
Safe and secure
Cash you put into authorised UK banks or building societies is protected by the Financial Services Compensation Scheme. (‘Authorised’ means the firm is registered with the UK regulator and must abide by its rules.)
Up to £85,000 per person in any one authorised firm is safe even if the firm collapses. This compensation limit applies per authorised firm, not by brand. Some banking brands are actually part of a single authorised firm. Check if any of your banks are part of the same authorised firm and make sure your combined balances don’t go over £85,000.
Where to open a Cash ISA
Cash ISAs are available online, through a branch or over the phone depending on the product and provider.
Your interest is free from tax (unless you are a 16 or 17 year- old and the money in your account was a gift from your parent) – in that case, they might have to pay tax if parental settlement rules apply – see above.
My advice here keep your Isa in a separate bank to where you keep your current account.
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