Is a Cash ISA Worth it? There’s Only 4 Reasons Why You’d Open One

The lowest Cash ISA rates on record and pressure on household finances have resulted in record amounts being withdrawn from these savings accounts in the last 12 months.

You may be asking yourself the same questions. Is a Cash ISA worth it? What are the advantages of using one?

Here are four reasons why you may want to keep some cash in your ISA.

1. Tax-Free Interest

The money you place in a Cash ISA is not liable to UK tax, unlike an ordinary savings account.

The same tax-free nature is true of any type of ISA. So, any profit you make from a stocks and shares ISA is free of Capital Gains Tax too.

However, you do still have to pay tax on any dividends from shares you hold in such an ISA, and this is deducted at source by 10%.

2. Easy Access to Savings Funds

Unlike some long term savings accounts, any money you invest in an easy-access cash ISA is still accessible should you need to make a withdrawal.

However, once you have made the full year’s allowance and then make a withdrawal, you can’t put any more money into the account to top it back up again until the next tax year when your new limit is available.

There are lots of easy access cash ISAs on the market which can be opened with as little as £1 and all offer similar rates of interest.

If you want a long term investment, and do not need access to the funds, a fixed rate ISA might suit you best.

These accounts can offer you a higher interest rate if you are prepared to lock away your investment for a couple of years or more.

Generally speaking, the longer the term you choose, the more interest you will be paid.

READ  Just 20% of Brits Would Open an Online-Only Bank Account

There are usually penalties for early account closure, however, which will affect the amount of interest you will receive.

3. Switching to Get The Best Rate

If the ISA you’ve saved with fails to perform as you’d hoped, you can switch your money to a different account which accepts ‘transfers in’.

You may get stuck on a lower rate past the first year of opening Cash ISA, so make sure you know your current rate.

Note that you can switch your investment from a cash ISA to a stocks and shares ISA, but not vice versa.

To make sure that you don’t lose your tax-free benefits, instruct your current provider to carry out the switch and fill in the appropriate paperwork.

4. Risk Management

If you are happy to undertake a certain amount of risk for potentially greater rewards than you would get with a cash ISA, then a stocks and shares product might be a good place to start.

The range of investments to choose from is pretty wide, including open-ended investment companies and exchange traded funds, in addition to company shares, bonds or trusts.

Do bear in mind that, as with any stock market driven investment product, shares can fall as well as rise and there is a risk that you could lose out in the short term.

With a UK based Cash ISA, you’ll want to check that it has FSCS cover.  This means your deposit would be covered by the UK up to a value of £85,000. You won’t have the same coverage with a Stocks and Shares ISA.

You can read more about the FSCS here.


best investment rate
Last updated: November 6th, 2017

Courtney Lucas

When not feeding her 3 cats, Courtney writes about a variety of subjects, but mainly business and tech. She is interested in Fintech and the latest news regarding interest rates.

London Capital & Finance - 3 Year Fixed ISA
Quarterly Income