This content originally appeared in the MSE weekly email on 8 April 2015.
MSE Towers is strewn with party popper debris, (own-brand) Cava corks and bunting after our New (Tax) Year do on Sunday night. Well, OK, it was just MSE Helen who ensured the new ISA guide was uploaded and working at 12.01am. But for savers there is at least a little more to celebrate.
EVERYONE aged 16 or over now has a brand-new £15,240 cash ISA allowance. Even if you opened one last week, the slate's wiped clean and you can do it all again.
Here are my 10 need-to-knows... and if you think it looks similar to the top of last week's email, what do you mean? That was so last year...
1. Cash ISAs are really simple.
Don't be scared of ISAs. I wish I could hypnotise people reading the words 'cash ISA' to instead just see:
"IT'S A SAVINGS ACCOUNT YOU DON'T PAY TAX ON."
Know this and it all becomes clearer. People wrongly say "I don't use a cash ISA as I don't want to lock my cash away," but you don't have to lock away cash in an ISA.
- What's the tax gain? Earn £100 interest in a normal savings account and, if you pay basic 20% tax, you'd only receive £80 (£60 on 40% higher rate tax). In a cash ISA, as there's no tax, you keep the whole £100. So, as long as rates are similar, ISAs win and top ISA rates tend to be higher anyway.
- How long is it tax-free for? Once in an ISA, it's tax-free, YEAR AFTER YEAR. So if you've big savings, you can gradually protect more of your cash from tax. If you'd started saving when ISAs were first introduced in 1999, you could now have £100,000+ (including interest) in tax-free savings.
- Do I have to keep the money in for a year to get the interest? No. While the rates quoted are annual, interest accrues daily, so whenever you withdraw you earn interest up to that point (though if you withdraw early on some fixed-rate ISAs you may get a little less interest as a penalty).
- Is my money safe in an ISA? Like all UK-regulated savings, cash ISAs have the full £85,000 per person per institution savings safety protection.
2. Top 1.5% cash ISAs if you know you need to access your cash.
As cash ISAs are just a savings account you don't pay tax on, like normal savings, there are easy-access cash ISAs where you can put cash in today and withdraw when you want. Here are the top payers...
Both Skipton BS and NS&I pay the top rate of 1.5%, but both are only for new money. If you want to transfer old ISAs to easy access, the Post Office pays 1.41%. All these rates are 'variable' so watch in case they drop.
Many ask "will better rates launch later?". Well, if you can wait till Thursday, West Brom BS is launching a 1.55% ISA (three withdrawals/year) which allows transfers. We'll have full details in our Cash ISA guide then, but it's unlikely (not impossible) rates'll get much better.
3. Most people should grab up to 2.25% cash ISAs.
Unless you KNOW you'll need the cash soon, fixed-rate deals pay more, give set interest rates, and the ISA rules mean (unlike normal fixed savings) providers can't lock your cash away - all they can do is levy early withdrawal penalties.
- Coventry BS's 2.25% fix until May 2019 (no transfers) is a corking deal. It allows you to withdraw cash by closing the account, costing you just 120 days' interest – roughly a third of a year. Withdraw after a year, and you'd get 1.51%, beating the top easy-access deals.
- Virgin Money's 1.65% 1yr fix is for new money & transfers. You can make partial withdrawals and lose 60 days' interest on them.
- Leeds BS's 2.1% 2yr fix is for new money & transfers (min £15k). You can withdraw 25% penalty-free, but lose 150 days' interest after.
- Santander 123 bank customers can get its 123 2% 2yr fix for new money & transfers (min £500) with a 120-day interest early closure penalty.
4. 5% taxed, if you're willing to switch bank account.
Cash ISAs easily beat normal savings, yet a few bank accounts pay far better rates, as loss leaders to promote switching. Interest is taxed, but it still usually beats top cash ISAs, and as they're bank accounts, you can withdraw whenever.
- For bigger savers, 3% AER interest + up to 3% cashback: Santander 123* is the only one which pays strong rates on a decent whack. You get 3% AER variable interest if you've £3,000 to £20,000 in it. That's 2.4% after tax for a basic-rate taxpayer and 1.8% for a higher-rate payer.
It has a £2/mth fee, but for most that's more than covered as it also pays cashback on direct debits from the account. You get 3% on mobile, phone, TV and broadband, 2% on energy and 1% on water & council tax – as Hannah tweeted us: "I get £260/yr and £504 since I opened it."
- 4% AER on £4k-£5k: Club Lloyds* (3.2% after basic tax, 2.4% higher).
- 5% AER up to £2,000: TSB* (4% after basic tax, 3% higher).
- Get £100 + £5 each month you're in credit: Halifax Reward* pays this regardless of how much you've got. As it's after basic-rate tax it beats TSB for most averaging under £1,500 in their account, even before the £100.
- Want to save monthly, not a lump sum? Two 'free switching bonus' bank accounts - First Direct* (free £125) and M&S* (free £100 M&S gift card) – have linked 6% regular savers where you can save up to £300 & £250/mth.
There are still some long-term reasons to open cash ISAs – read a full analysis of the pros and cons in my Santander 123 v Cash ISAs blog.
The 'using bank accounts as savings' need-to-knows...
- Not everyone can get 'em. Most require... a) you to pass a credit check b) a minimum monthly deposit c) you set up a couple of direct debits.
- The rates are variable. So keep your eyes open in case they change.
- You can open more than one. This lets you save larger sums, but it can be tricky. For full help see the 5% Savings Loophole.
5. Over 65? Have you opened a Pensioner Bond?
While the interest is taxed, NS&I 65+ Guaranteed Growth Bonds (known as Pensioner Bonds) pay 4% fixed for 3 years or 2.8% fixed for a year, so after basic tax it's 3.2% and 2.24%. That beats all ISAs.
For higher-rate taxpayers at 2.4% and 1.68% they beat most ISAs. Full help, pros & cons in Pensioner Bonds.
6. Check old ISA rates – many are pitiful. Then boost them.
Many old ISAs pay tiny rates, eg, the Halifax ISA Saver Online pays just 0.25% (it paid 3% in 2012) – check yours. You've a right to transfer to a new provider, while combining makes transferring in future (when rates change) easier.
All the above ISAs allow transfers (unless stated) and while you can add money to one where you've also transferred in, you don't have to. There's a full rundown in Top ISA Transfers.
To transfer, don't just withdraw the cash, as it'd no longer be in an ISA. Tell the new provider to transfer it for you instead.
7. Want a Help to Buy ISA? Don't open a cash ISA.
Last month's Budget announced the creation of a first-time buyers' Help to Buy (H2B) ISA to launch this autumn, where for every £200 you contribute, the Government adds £50 (on top of bank interest). See our new Help to Buy ISA guide.
In simple terms you can't open an H2B ISA and a cash ISA in the same tax year so it's safer to avoid the combination. If you only want a cash ISA for a few months, there is a way to do both. For a full 'how to', read H2B ISA & Cash ISA info.
8. If your income's sub-£15,600/yr all your savings are tax-free anyway.
Since Monday, most people with total incomes under £15,600/yr can register to not pay tax on savings. That's because as well as the normal £10,600 personal allowance (where you don't pay income tax on earnings) you can now earn another £5,000 of savings interest tax-free too.
If you've earned income (ie, not from savings) above £10,600 though you lose a pound of savings allowance per pound earned. An example helps...
If you earn £12,000 you're £1,400 above the standard personal allowance, so the £5,000 savings allowance falls by that sum, giving only £3,600 more tax free. (For more info including how to get it, see 2015 tax-free savings.)
In a year, every basic rate taxpayer will be able to earn £1,000 interest per year tax-free (higher rate £500) due to the new personal savings allowance.Yet don't let that sway you now – and even when it hits there will be times when ISAs win, see the Personal Savings Allowance guide.
9. New Junior ISA & Child Trust Fund (CTF) year too.
All under-18s have a new 2015/16 tax-free savings allowance of £4,080. Most get it in the form of a Junior ISA, yet those born between 1 September 2002 and 2 January 2011 instead have a Child Trust Fund (which you can now convert to a Junior ISA).
Yet getting these accounts for your kids is less clear-cut, as children tend not to earn enough to pay tax anyway. Full info in Top Junior ISAs or Top Child Trust Funds, plus also see Top Children's Savings.
10. The tip of the ISAberg.
There's lots more info in our cash ISA guide that can help you. Here are just a few more pointers...
Don't forget stocks & shares ISAs. While I've focused on cash ISAs as that's our specialty, you can also use your ISA allowance for stocks & shares ISAs.
- 16-17 year-olds can open standard AND Junior ISAs. Weirdly they get both the Junior ISA allowance and the main cash ISA allowance.
- ISA withdrawal rules change in autumn. Now, you can only put in £15,240/yr. Put in £10,000 & you've £5,240 left even if you later withdraw. Flexible ISA rules mean you'll be able to withdraw cash and replace it.