The arrival of the personal savings allowance in 2016 led some people to abandon cash Isas. After all, what's the point when you can now earn tax-free interest on a standard savings account? However, this is short-sighted. Cash Isas offer a lot more than just tax-free savings today they are a way to build a sizeable tax-free savings pot over your entire lifetime.
For example if you had saved your cash Isa allowance every year since they were introduced in 1999, you would have £140,000 by now (excluding any interest). No matter how big that pot gets, it will never be liable for income tax (assuming the rules don't change, which would be a very foolhardy move for any government to make). Not only that, but thanks to rule changes made last year, should you die before your spouse, you can pass that tax-free-income-generating pot on to them too.
By contrast, the personal savings allowance only allows a basic-rate taxpayer to earn up to £1,000 a year in interest tax-free, falling to £500 for higher-rate taxpayers and with no allowance for additional-rate payers. So, outside an Isa, you could face a tax bill in future if your income-tax bracket changes or your pot grows large enough to earn returns above the allowance (as the hypothetical pot above certainly is).
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The cash Isa family
So cash Isas should still form a core part of your savings plan but which ones should you use? The Isa family has expanded a great deal in recent years and you now have a whole variety of accounts to choose from. If you are over 18 and not saving for anything in particular, then you need a standard cash Isa.
You can save up to £20,000 a year into one provided you aren't also saving into any other form of Isa and you can access the money whenever you want to, depending on what type of account you go for.
If you need instant access then Leeds Building Society has a cash Isa paying 1.21%. For 95 days' notice, Charter Bank offers 1.31%. Also, if you are getting an instant-access account, check whether it is a flexible Isa. These allow you to withdraw money and repay it within the same tax year without it affecting your allowance. So, if you had deposited £10,000 in your cash Isa then withdrew £5,000 you could pay up to £15,000 back in before the end of the tax year. Not all cash Isas are flexible so check before you withdraw.
If you are prepared to lock up your money for longer, you can get a rate of 1.7% over two years from Al Rayan Bank, or 2.25% over five years from Charter Bank. But if you are under 40 and saving for your first house, or won't need the money until you are 60, you could opt for a lifetime Isa (Lisa). These allow you to pay in up to £4,000 a year, then at the end of the year the government will add a 25% top-up. At present, only the Skipton Building Society offers them, and it pays just 0.75% interest. When you are saving over the long term like this, an investment Lisa maybe a better option.
Children also have their own Isas: the under-16s can pay up to £4,128 a year (rising to £4,260 from 6 April) into a junior Isa (Jisa) but the money can't be accessed until they turn 18. The best rate on a cash Jisa at present is 3.5% from Coventry Building Society. But again, if they are going to be saving for the longer term, an investment Jisa may be best.
How to transfer your cash Isa
Don't forget to check the interest rate you're getting on existing Isas. If you can get a better rate elsewhere, you should transfer your money. You need to follow the transfer rules when moving money in order for it to retain its tax-free status. If you simply withdraw it and pay it into another account, then it will count as part of this year's Isa allowance so don't.
Instead, first check that the account you want to move to accepts transfers from other Isas. Then ask your new provider to transfer the money from your old Isa. The Leeds Building Society instant-access account paying 1.21% accepts transfers. If you don't need instant access, Paragon Bank has a two-year fixed-rate Isa paying 1.67% that allows transfers.
Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance.
Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.
Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.
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