STOP PRESS. ISA allowances to increase.
In the Chancellor's Budget statement on Wed 22 April, he announced that the annual Cash ISA allowance will increase to £5,100. This will happen for this tax year (09/10) for the over 50s, and will come into force on 6 October 2009. For everyone else, the increased allowance will start from the next tax year, 2010/11. Read the news article, ISA Allowance increases
Saving without using an ISA just lines the taxman's pockets. A cash ISA is simply a tax-free savings account, which can boost your interest by well over half. You can put in £3,600 every tax-year (between now and next April), but don't use it & you lose it. This guide compares best buys and includes a free calculator to work out the gain.
What is an ISA?
For seven years now whether on telly, radio or in m'book I've used the same analogy to explain ISAs. So why stop now? Here come the cakes!
For a more detailed explanation of ISAs, (don't worry it still includes the cakes) see the ISA Guide.
How do Cash ISAs work?
While the annual ISA allowance is £7,200, only £3,600 may be put in cash (these increased in the budget, read more). The best route for this is what's called a Cash ISA; these work just like normal savings, except the interest isn't taxed.
Usually, a basic rate taxpayer pays a fifth of their savings interest in tax, a higher rate tax payer two-fifths. Turning this around, it means basic rate taxpayers earn a quartermore interest at the same rate in a cash ISA, and higher rate taxpayers two-thirds more!
There are a few oft confused ISA facts:
Money may be withdrawn at any time without losing tax benefits.
Yet once the money's withdrawn, it can't be returned. An example should help: Put £2,400 in and there's £1,200 of this year's allowance left. Withdraw £1,000 from it, and you may still only contribute £1,200 more. The fact you've withdrawn the money doesn't change anything.
You get a new ISA allowance each tax year.
Each tax year (6 April until the next April 5) everyone aged 16 or over gets a new cash ISA allowance. If you don't use it, you lose it. Yet if you do put the cash in, you can keep it in there, tax-free for as long as you like. And as soon as the next tax year starts (i.e., 6 April) you can put a whole new £3,600 in too.
Only one Cash ISA per year.
You can only have a Cash ISA with one provider in any tax year – you can't split it. However you can hold cash-ISAs from different years with different providers.
How safe are your savings?
Bank collapse was once easy to dismiss, then the credit crunch and global market turmoil hit. The UK soon found itself bailing out Northern Rock, and the US authorities followed for even bigger bank Bear Stearns. This means these days every sensible saver should ask “is my money safe?.
The answer is quite simple. Provided your money is in a UK regulated bank or building society account, it’s protected under the Financial Services Compensation Scheme (FSCS) and its golden rule counts for Cash ISAs too...
The first £50,000 per person, per financial institution is guaranteed.
Sadly this is the simple face of savings safety; the exact rules are more complex involving how different banks are registered and what counts as a financial institution. For full info read the full Are My Savings Safe? guide.
How to maximise safety
Unless you've done very well in terms of earning interest, any cash ISA balance is unlikely to top this £50,000 limit, so there's likely to be no problem. Yet if you have further savings in other accounts with the same bank or building society, then in the unlikely even that it went bust only the first £50,000 in fully guaranteed, so for total peace of mind don’t put more than this in any one institution; spread it around.
For those with very large amounts of savings (for example a house sale) this could lead to lots of accounts, even if you've too much to stick to the £50,000 limit for each one, the general rule of not having all your eggs in one basket still works. For more info see the how to get 100% safety section of the savings safety guide.
This guide and best buys
It's impossible to pick "which bank is in trouble?", we've seen great names of world banking like Goldman Sachs and Merrill Lynch in trouble. Therefore the only solution for this site is that we'll report the top rates regardless, alongside explaining any 'protection oddities'. So far, world governments have reacted to protect their banks and no savers have lost money, and its likely (though not certain) that will continue.
The UK's Top Rate Cash ISAs
In general, the higher the interest, the better. Yet cash ISA providers play the same tricks as savings account providers, such as short-term bonus interest rate hikes to attract your custom, and annual limits on withdrawals. Also a few have transfer penalties, meaning if you try and shift to another provider you're charged. However, none of the following do.
As Cash ISAs are generally 'variable rate', meaning they move both with the Bank of England base rate and for providers' own competitive reasons, so check reguarly that your rate is still competitive. If not, transfer to a better payer. For alternatives to monitoring interest rates, read the Fixed Rate Accounts section.
Unless stated, all the accounts have full protection under the £50,000 per person, per institution rules. Though do check how institutions are linked and other notes in the safe savings guide.
The Top Rate No-Notice Needed Accounts
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IF 2.75% AER. Clean, online or phone account
The Cash ISA from Intelligent Finance offers 2.75% AER from just £1. It allows transfers in of previous years' money, and there are no notice periods or penalties when making withdrawals.
Quick Stats. Rate: 2.75% variable AER. Min. Deposit: £1. Allows transfers from previous years' ISAs?: Yes Access: Phone/Online -
Standard Life 2.65% AER Online, clean account
Not far behind, the Cash ISA from Standard Life offers 2.65% AER from just £1. It also allows transfers in of previous years money, with no notice periods or penalties when making withdrawals.
Quick Stats. Rate: 2.65% variable AER. Min. Deposit: £1. Allows transfers from previous years' ISAs?: Yes Access: Phone/Online -
First Direct 2.6% Online, clean account. Accepts transfers
The next highest rate is from First Direct's cash e-ISA, which pays 2.6% AER fixed until 31 July 2010. Despite the guaranteed rate, It’s instant access and you only need to save £1 to open it. After July 2010, the rate drops to 0.2% AER, so transfer out at that point.
It also usefully allows transfers in from previous years' cash ISAs, except those held with First Direct. It's an online only account, and you can start saving from £1. Quick Stats. Rate: 2.6% AER, fixed until 31 July 2010. Min. Deposit: £1. Allows transfers from previous years' ISAs?: Yes Access: Online Got an old ISA... up its rate too
If you already have a Cash ISA, either from this or previous years, don't assume you're stuck. It's possible to transfer to a higher paying provider (most will accept transferred cash ISA money). There are currently a range of best buy cash ISAs which ONLY allow transfer money in, not new money, for details on these see the Cash ISA Transfers guide.
To see how switching will affect your savings, use the ISA Savings Calculator and input the interest.
The ISA clock is counting down the time left in this ISA year.
The Top Fixed Rate Accounts
If you're willing to lock your cash away there are some alternatives which guarantee a decent rate for a set period of time. Yet do remember...
Fixed rate ISAs give a guaranteed rate for a set period, but you can’t take your money out during that time.
Therefore they're only suitable anyone happy to lock cash away for the entire term; you lose the flexibility to ditch and switch to a better payer if the rate is no longer competitive, or if something changes in its safety stakes. (While your money is supposedly locked away for 1 to 5 years, providers are forced to permit withdrawals, usually with an interest penalty of between 60 and 180 days).
Top One Year Fixed Rate
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Bank of Cyprus, 3.33% AER Warning! All savings not protected by UK safety scheme
The top rate is Bank of Cyprus Cash ISA Bond, paying 3.33% AER on amounts above £1 in this telephone or post account. Transfers in from previous years’ ISAs are allowed within 6 weeks of opening the account, plus you can withdraw money, although you will be charged 180 days worth of interest.
Importantly, the account is NOT fully protected by the UK compensation scheme with the first €20,000 (c. £17,000) of savings covered by the Cypriot scheme instead. Above this amount the UK scheme tops up your protection to £50,000 though. For full info on how the protection works, read the foreign banks section of the Are Your Savings Safe? guide.
Top Deals of other lengths
If you want to lock your cash away for longer, other length deals are available, yet in the current climate there's little guidance on where rates will be in a few years time. If you choose to lock your cash away for several years now, fixed rates could improve, meaning you'l be locked into a non-top pick account.
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Two, Three and Four years up to 4% AER
Save more than £500 in a Halifax Fixed Rate ISA Saver and you'll get a rate of 3.5% AER (two years), 3.75% AER (three years) and 4% AER (four years). You can apply for the account by phone, branch or online.
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Three years, 4.2% AER
If you can save £3,600 in a lump sum, Principality BS's Three Year Direct Fixed ISA pays 4.2% AER, with no withdrawals allowed for the duration. Financial strength rating's agency Moodys downgraded some institutions, including Principality, in April 2009, but as you can't save over the £50,000 safe savings limit in an ISA, it's not a huge issue here.
Alternatively if you want to save from £1, Leeds BS's 3 Year Fixed Rate ISA pays 3.75% AER for amounts from £1. The account allows transfers in and up to 25% to be withdrawn penalty free. It can be opened online, but only operated by branch or post.
Fixed Rate deals can change regularly, for a full list of fixed rate ISAs use the MoneySupermarket* (select Cash ISAs and then Bonds) comparison or Moneyfacts.
The Top Regular Saver ISAs
An alternative option is the 7% Regular Saver Cash ISAs below. This works like standard Regular Saver accounts, where you can only save up to a maximum amount each month, preventing you from whacking big lump sums in. Yet if you want to put cash away each month, the rates can be very strong.
However there are tricks to earn a big rate on a chunk of cash anyway; for a more detailed explanation read the full Regular Saver guide.
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First Direct 7% AER for 12 months. Online account for existing customers
The First Direct Regular Saver ISA pays 7% AER, yet this online account is only available for those who have a First Direct 1st account, which is a fees-free account provided you earn £23,500 or over (read more in the Best Bank Accounts guide).
You can save from £25 to £300 each month but you can not miss a payment or withdraw money; if you do, the account changes to the e-ISA, currently paying a low 0.5% AER.
Rate: 7% AER fixed for 12 mths. Monthly Deposit: £25-300. Make withdrawals?: No Miss a payment? No Operated by: Online/Post/Tel
Be careful if it's not the start of the tax year.
As you’re only allowed one cash ISA per tax year (see Cash ISA Guide) and these accounts last 12 months, opening one at any time other than the start of the tax year means you’re automatically choosing next year's cash ISA now.
Plus by the time the regular saver cash ISA ends, you mightn't have used all of next year’s cash ISA allocation, though you should be able to top it up in whatever cash ISA it becomes.
This might sound a tad confusing, so an example should help...
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Sally Saver hasn’t done a cash ISA for the 2008/9 tax year, so she opens a regular saver cash ISA on 27 Feb 2009 with the max. £300 a month. In month three, her April money goes in, so she has effectively paid into a new 2009/10 tax-year cash ISA with the same bank, and as she’s only allowed one cash ISA a year, that’s her lot.
By the Feb 2010 the regular saver cash ISA automatically becomes an easy access cash ISA. Sally’s put £3,000 in, and still has £600 left of the year’s allowance. Yet she can simply add that to the easy access cash ISA, or transfer the whole lot to a higher payer.
What about Toisas?
The Tessa only ISA, tongue twistingly known as a Toisa, was another special tax-free product. Old style TESSAs, the forerunner of the cash ISA, lasted for five years and then matured. If this occured any time between 1999 and 2004, the TESSA automatically turned into a Toisa.
Since April 2008, all Toisas have become simple Cash ISAs, meaning all normal ISA rules apply. You can no longer add funds to an old Toisa, but if you have any money left in one, you can transfer it and up the rate. You're then able to add funds to transfered Cash ISA account. See Cash ISA Transfers for the best accounts that let you move money in.
The Savings Calculator
Below is a special calculator designed to tell you all you need to know about your ISA savings. Simply enter all the details, and it'll give you the answer. For increased accuracy use the AER (Annual Equivalent Rate) which should be listed on your statement. Obviously as most accounts' interest rates are variable, the calculations will change if the rate does, but the calculator should give you a good idea.
The calculator assumes you put money in at the beginning of each month, so if this isn't how you do it, the answers will be ever-so-slightly out. If you don’t make regular deposits but put in lump sums, figure out the monthly equivalent for a rough answer. Feel free to play with the results to see how your savings are impacted.
A basic rate taxpayer saving £3,600 over three years, in a poor savings account, of which there are sadly many, would earn £9 interest. In a top savings account it's £310, but the same amount in the top cash ISA, as it's tax free, earns £333. Yet not all cash ISAs are the same, one of HSBC's pays a paltry 0.25%, meaning it'd underpay the market leader by over £300 in interest.
The benefits are even bigger for higher rate taxpayers; then the top cash ISA outperforms the top savings account by over £100.
Interest earned on £3,600 over 3 years
Interest Rate | Untaxed | Basic Rate Tax | Higher Rate Tax | |
Poor Savings Account (1) | 0.1% | £11 | £9 | £6 |
Top Savings Account (2) | 3.46% | £387 | £310 | £232 |
Poor ISA (3) | 0.25% | £27 | £27 | £27 |
Top ISA (4) | 3% | £333 | £333 | £333 |
Assumes rates are stable (1) Halifax Liquid Gold (2) Ulster e-savings Plus (3) HSBC Cash ISA (4) ING Direct Cash ISA | ||||
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