Cash ISAs - Where Now?
Low interest rates have seen the popularity of Cash ISAs wane considerably. Over the past 6 months nearly £2 billion has been withdrawn from these accounts compared to inflows of over £4 billion during the same period last year.
The best variable rate Cash ISAs offer 1.45% compared to 1.55% for an ordinary savings account. The ISA interest is, of course, tax‐free but it’s hard to get excited at these levels.
Fixed rate Cash ISAs offer up to 2.6% over 5 years but rates of up to 3.05% are available from non‐ISA accounts. Furthermore, the Santander 123 Account – a Current Account – offers 3.00% on balances up to £20,000 with instant access.
For many the death knell will definitely sound for the Cash ISA with the introduction of the Personal Savings Allowance on April 6th 2016. From that date all interest will be paid gross by banks and building societies and the first £1,000 will be tax‐free for basic rate tax payers (£500 for higher rate tax payers). So, a basic rate tax payer could invest £33,333 at 3% and pay no tax on the interest. This rises to £50,000 at 2%.
So should everyone be rushing for the door?
Perhaps not everyone. For additional rate tax payers there is no Personal Savings Allowance and so Cash ISAs will still be valuable, saving tax at 45% on interest. For larger savers, Cash ISAs will also still have a place. If you have decided that the stock market is definitely not for you, you may have accumulated significant sums in such accounts. You will quickly exceed the £1,000 or £500 Personal Savings Allowance.
And we mustn’t forget that interest rates will eventually rise again. If we get back to the heady days of 5% interest rates the Personal Savings Allowance will only shelter £20,000 from tax.
Nor must we forget that tax rates and tax incentives seem to be political playthings. Successive governments have been all too keen to use smoke and mirrors to boost their short‐term tax revenues. So there is no guarantee that the Personal Savings Allowance will last indefinitely. Money in Cash ISAs, however, is always likely to be safe from the tax man’s clutches.
Are there any alternatives? Well, repayment of expensive debt should be top of everyone’s agenda. Then, of course, there are Stocks & Shares ISAs for longer‐term investors who are prepared to accept some risk to capital. And never forget your pension – still the most tax‐efficient means of saving for your future and your family’s future.
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