Cash ISAs – A quick rundown:
If you’re considering setting up a little rainy-day fund, a cash ISA should be top of your list of things to look into – they’re not as complex as their predecessor, the PEP, and better interest rates are available – but people still consider them overly complex.
The first thing people ask when introduced to an ISA is usually “Well, what’s the difference between this and a regular saver?” – And the answer is, in fact, very simple- tax. A cash ISA allows you to deposit up to £3,600 (Or £5,100 if you’re over 50) and not pay any tax on the interest earned on it. Those amounts are soon set to change though, and as of April 2010 everyone will be able to deposit £5,100.
Because of a Cash ISA’s tax-free nature, you shouldn’t be put off if the account has a lower interest rate than a normal saver – a regular savings account would need to offer a 3.5% interest rate to earn as much as a cash ISA at 3% interest, and if you pay the higher tax rate, you would need to find a savings account that would pay 5%. You must remember, however, that any money withdrawn from an ISA will no longer be eligible for tax benefit, and the amounts detailed above are a total amount you can deposit in one tax year – regardless of how much you withdraw, once you have reached your deposit limit you cannot put any more in.
Once you’ve found your new ISA account however, don’t be tempted to rest on your laurels. Providers are always offering special offers and rates, and quite often it can be financially beneficial for you to keep an eye on what is available. Most providers will not tie you down to a specific time period, so you can make the move when you want to. Moneysupermarket says “As with standard savings deals, there are catches that you need to watch out for. Some accounts include introductory bonuses, so the interest rate drops after a while – there is no need to avoid such accounts, but you need to make a note to move your money elsewhere once the bonus period ends otherwise you could be left earning an uncompetitive rate of interest.” The one golden rule when it comes to moving ISAs, however, is this: Never just withdraw the balance from one ISA to place it in another, as you will lose your tax benefit entirely. Your new provider should be able to organise a transfer of funds between the two accounts, thus keeping your benefits in tact.
Before committing to a cash ISA account, make sure you shop around first. As shown above, cash ISAs can make a huge difference to your savings, so finding the right one with a good interest rate is paramount. Compare cash ISAs at moneysupermarket to get the best deals.
Written by the Cash ISAs team at Moneysupermarket .com