Whether you need shelter on a rainy day, or sunglasses for a tropical one, savings are there to keep you steady through life’s celebrations and surprises. That’s why, when it comes to building up those savings, it could be worth exploring the potential advantages of a Cash ISA.
Like all forms of ISA, a Cash ISA is a “tax wrapper”. This means you can put money into your ISA account without having to pay capital gains or income tax on any interest earned, so long as you don’t exceed your allowance. For Cash ISAs, that allowance is set at £20,000 for the current tax year.
So, what exactly are the full benefits of a Cash ISA, and is it the right pick for you? Let’s take a look at all the ins and outs, so you can get to grips with its pros and cons before making any big decisions.
What are the benefits of a Cash ISA?
There’s no cookie-cutter solution when it comes to saving effectively. What works for some, might not be best for others.
Let’s break it down by looking at each individual element so you can make an informed decision.
Tax Benefits
Let’s start with the big one. When you deposit into a Cash ISA (and any other ISA types you have), you’ll pay 0% tax on any interest earned on amounts up to £20,000. This allowance then renews each tax year on April 6th.
(Your tax treatment will be dependent on your individual circumstances.)
It’s important to note that this is not a perk exclusive to just Cash ISAs, as Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs all offer tax-efficient ways to build your money.
Remember, too, that the allowance is spread across all the ISAs you pay into during a tax year (you don’t get £20,000 for each account), and that there are limitations to the Lifetime ISA to be mindful of. What’s more, different ISAs often suit different needs.
For example, a Stocks and Shares ISA (sometimes called an Investment ISA) allows you to invest tax-efficiently, with your money placed in assets such as bonds, shares and stocks to potentially grow over time. Of course, you should always remember that capital is at risk when investing, and you could get back less than you put in.
There’s also the option of opening a Lifetime ISA (LISA) which is typically used to help someone put aside money for their first home or as a personal pension pot. Although you can only open one Lifetime ISA, and the amount you can put into one is capped at £4,000 per tax year (don’t worry, you can spread your remaining £16,000 allowance in other ISA types) — there’s a big benefit to them, as they come with a 25% government “top up” for amounts up to £1,000 per tax year. year.
Flexible Cash ISAs
Flexible cash ISAs are, as they say on the tin, flexible.
That means you can withdraw your money for any reason, and, as long as you redeposit within the same tax year without exceeding the £20,000 limit, it won’t impact your tax-free benefit.
Remember, unless explicitly stated, most Cash ISAs aren’t flexible. Withdrawing from a non-flexible ISA, would mean you effectively “spend” your £20,000 ISA allowance and won’t be able to replace it.
If you’re using a non-flexible ISA, you’d need to be comfortable with either:
- committing to holding your money in the account until the new tax year (April 6th),
- or understanding that by withdrawing early you’d lose that portion of your tax-free allowance for this year.
If you don’t think you’d use your entire £20,000 for this tax year, then it may not matter to you. But if you think you will, this is one of many reasons why you should always do research into ISA providers and their benefits before making a decision.
Wealthify’s Cash ISA and Stocks and Shares ISA are both flexible, for example, giving you the freedom to withdraw if you need to — without it affecting your remaining ISA allowance for the year.
You can transfer your Cash ISA
We all know that savings require dedication, but that doesn’t mean you should overcommit to one particular provider. This is one reason a Cash ISA can be a good, adjustable option when it comes to growing your savings, as you can transfer your money to a new provider as and when you need to.
There could be a number of reasons you opt for this choice, such as better benefits or preferable interest rates. What’s more, you can even transfer to a different ISA type — for example, moving money from a Cash ISA into a Stocks and Shares ISA.
If you do decide to transfer your ISA, then remember to think carefully and research thoroughly before making the move. Crucial things to look out for include potential exit fees when leaving your current provider, and that you use the proper ISA transfer form to manage the move (you don’t want to miss out on your tax benefit when exchanging money between accounts).
A good way of saving for your short-term goals
Our lives, goals and dreams can be divided in lots of different ways. Most of us will have ambitions and milestones we want to reach in the next few years — as well as ones we hope to achieve in a few decades' time.
In terms of saving, a Cash ISA is often a good option if you’re hoping to save up for something in the short-term (in the financial world, this is typically deemed to be a timeframe of five years or less).
Of course, there are many important things you might need in the next five years that money is integral to — that could be a car or a house deposit or funds to go towards a renovation. In this situation, a Cash ISA can help you grow your wealth as you strive towards that all-important financial milestone.
Inheritance benefits
Thinking about what might happen to your money and assets after you die is always worthwhile when it comes to financial planning.
A big benefit of an ISA is the associated inheritance rules. If you were to pass away, your spouse or civil partner could inherit the full value of your ISA through an Additional Permitted Subscription (APS), allowing them to retain the tax benefits.
Less risky than a Stocks and Shares ISA
As discussed, a Cash ISA isn’t the only ISA option available to you. Many people opt for a Stocks and Shares ISA as a way to invest money without having to pay any tax on their potential gains (in the same way that interest is tax-free in a Cash ISA).
While this can work well for some, one downside of a Stocks and Shares ISA is that there is generally more risk involved, especially in the short term. Investing tends to be considered a long-term strategy for building wealth (think, five to ten years at a minimum, and ideally longer!).
Market volatility is always a factor to consider with investing, and that could be an even bigger consideration if you have a particular financial goal you’d like to reach within the next five years. Because Cash ISAs are not tied to the markets, they tend to be more consistent. But on the other hand, the Cash ISA interest rates may not match inflation over a long period of time.
Cash ISA considerations
Now you’ve got a good view of all the potential benefits of a Cash ISA, it’s essential we also walk through some other considerations and potential drawbacks. After all, no financial product is entirely perfect (and exercise caution if you ever come across one that seems like it might be!), but with the right intel you can confidently decide what is a good fit for you. So, let’s dig into the details.
Cash ISA contribution limits
Yes, a Cash ISA has tax benefits — but they are not without limit. With the annual allowance of £20,000 for each tax year, anything above this amount will no longer be eligible to accrue tax-free interest and so cannot be deposited into your ISA account.
This is worth giving some thought to ahead of time, so you can make contingency plans for any expected overflow of the allowance amount. For example, if you think you will come close to reaching your allowance, it could be worth opening a savings account to go alongside your ISA.
Of course, it could also be the case that a Cash ISA is not the right option for you because of this limit, or – alternatively – that it might factor into a wider financial ecosystem where you hold a number of ISAs and savings accounts simultaneously.
It’ll be your individual responsibility to make sure you don’t go over the £20,000 allowance in the tax year (April 6th to April 5th) and to remember this amount should be spread across all ISAs you’re paying into during the tax year.
Whichever the case, make sure you fully understand the allowance, benefits and potential drawbacks of each option, alongside details of the provider which offers them, before taking any big next steps.
Interest rates may decrease
If you’re looking to save money, it likely goes without saying that an added top-up is always welcome. Savings accounts provide a space for that not only by offering a location for you to deposit money but also facilitating the accrual of interest on the funds in your account. Thus, savings accounts can give your overall amount a welcome little boost in addition to the money you’ve put away yourself.
As we’ve covered, this works the same way in a Cash ISA, (in addition to the tax-free benefit), however, this doesn’t mean it is absolutely sure-fire that your money will grow with consistency over time.
If inflation rises to be higher than Annual Equivalent Rate (AER), the money stored in your Cash ISA will lose value. While it is still true to say that Cash ISAs are typically steadier than Stocks and Shares ISAs, this doesn’t necessarily mean they will outperform a Stocks and Shares ISA which, especially in the long-term, can see better gains due to long-term exposure to the market.
Please remember, with investing your capital is at risk. The value of your investments can go down, as well as up, and you could get back less than you put in.
Funds may be locked in
Sometimes it can be helpful for us to lock-in savings. Accounts which allow this may be appealing as they remove the temptation to dip into your funds. However, there could also be a myriad of reasons that accessing savings is important.
In the first place, you might be putting away money in case of an emergency, and even if that’s not the case, an emergency or opportunity could nevertheless crop up. In such a case, having your money locked up and inaccessible in a standard Cash ISA might be stressful indeed. That’s why some providers, such as Wealthify, offer flexible, easy access Cash ISAs.
With a “non-flexible" ISA, withdrawing money when you need it might be complicated, and – even if it is achievable – your allowance may be impacted. Conversely, an easy access Cash ISA, such as the one provided by Wealthify, allows you to access funds when you need them, and so long as you re-deposit before the end of the current tax year, your allowance will remain intact.
Cash ISA eligibility
Well, you’ve waded through a lot of information to get here. If a Cash ISA sounds like it might be a good fit for you, the final thing to check is whether you’re actually eligible to open one.
To qualify to open a Cash ISA, you must meet the following criteria:
- Be aged 18 or over
- Be a UK resident (this is for tax purposes)
- Have a national insurance number
- Be opening an account on your own behalf (you cannot hold a joint ISA with someone else)
For full information on the government’s guidelines on a Cash ISA eligibility, take a look at their information page on ISAs and associated rules.
Is a Cash ISA right for me?
Hopefully by now you’re feeling much better acquainted with Cash ISAs.
They can provide a helpful, secure and tax-efficient way to grow your savings to help you reach a short-term financial goal. They also come with the added bonus of inheritance, given a Cash ISA can transfer in exact value – including any remaining allowance – to a spouse, if you were to pass away. And with a flexible Cash ISA, you can still withdraw money when you need it.
If you’re still feeling unsure about whether a Cash ISA is right for you, don’t forget to check out our other blog – ‘Are Cash ISAs Worth Having?’.
If you’re feeling ready to take the next step, explore our Cash ISA, where you’ll find everything, you need — from key benefits to a step-by-step guide on opening or transferring your account.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Resources:
