How to choose the best cash ISA

How to choose the best cash ISA

We all know that interest rates are at historic lows – and with them showing no sign of increasing in the near future, you could be forgiven for thinking that Cash ISAs would be quickly losing their popularity.

Despite the fact that even significant levels of saving don’t get much more than a few pounds in interest, more than eight million people in the UK pay into a cash ISA each year. Perhaps with good reason: if the last year has taught us anything, it’s that what you once thought impossible is this week’s ‘new normal.’. And in such uncertain times the value of a cash buffer cannot be underestimated.

It’s easy to think that when rates are so low it’s not worth the time and effort to shop around; to make sure that you’re getting the best cash ISA for you. We’d argue that’s a dangerous approach to take with any aspect of your financial planning. We’re happy to advise clients on the best available products, and clients doing the work themselves should be equally diligent.

Traditionally, the longer you lock your money away for the higher the interest rate. At the time of writing 1.25% is available on a cash ISA – but you need to deposit at least £1,000 and tie the money up for seven years. There are other rates above 1% – but they are typically five year fixed rates, and the simple fact is that most cash ISAs are paying a rate of interest below the current level of inflation.

So would you not be better off forgetting cash ISAs and simply putting your money in a savings account, retaining flexibility and easy access to your money?

We would almost always recommend making the most of your ISA allowances, purely because there is no way of knowing when the Government might withdraw or cut the personal savings allowance. As we saw in the recent Budget, the bill for the measures taken to support jobs and businesses during the pandemic will have to be paid at some point.

Once your money is in a cash ISA it is sheltered from the taxman indefinitely. If,  for example, you wanted to move your savings into a stocks and shares ISA, putting it into a cash ISA now will protect the tax-free status of the money.

In summary, despite the historically low interest rates cash ISAs still have an important role to play as part of many savers’ and investors’ overall financial planning portfolio – and it is still worth doing the necessary research to find the best rate available. As the old saying goes, ‘Take care of the pennies…’

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