Cash ISAs Not Looking Alluring

Written by Karen Bryan

£20 bank of england noteNormally in late March/early April I’m on the lookout for the highest fixed rate Cash ISA, in order to put in the full ISA allowance at the start of the new tax year on 6 April. I’ve always gone for fixed rate accounts in order to get the highest rate of interest and I’ve been happy to tie up the money for up to three years.

However, this year it’s different.

We’re thinking of moving home, so I don’t want to tie up any money long-term. The penalties for early withdrawal or closure of fixed rate Cash ISAs, often at least 120 days loss of interest, would mean that an instant access account would yield a higher rate, once the penalty was deducted from the fixed rate account.

The interest rate of 1.5% (variable) currently on offer in instant access Cash ISAs is much lower than I can get on current accounts such as 3% (variable) on the Santander 123 Current Account and regular savings accounts such as 6% (fixed) on the M&S Regular Saver. Although I’d have to pay 20% income tax 0n interest received in non ISAs, the net (after tax) rate of 2.5% received on the instant access non ISA account is still much higher than the 1.5% on an instant access Cash ISA.

From 6 April 2016, basic income tax payers will be able earn £1,000 tax-free interest on standard savings accounts. This means that unless you have a lot of savings, you won’t need to bother with a Cash ISA account to avoid paying tax on the interest.

I may still move some money into a Cash ISA just before the end of the tax year 2015-2016, in order to gain the long-term tax-free status. This would allow me to take tax-free income from my Cash ISAs to top up my pension in the future.

With the annual Cash ISA allowance increasing to £15,240 from 6 April 2015, when it was £5,760 in the tax year 2013/2014, I doubt that I will have enough cash to keep putting in the full allowance every year.

Interest rates correct on 27 March 2015.