For those of you exploring the options open to you for saving money in these extraordinary times, an ISA is an Individual Savings Account that offers you the ability to save money tax-free, which mean you can get more for your money.
There are several types of ISA. They are:
- The Cash ISA – often referred to as a Basic ISA
- The Help to Buy ISA – otherwise known as an H2B ISA – closed to new investors from the 30th of November 2019.
- The Innovative Finance ISA – also known as a Peer-to-Peer ISA
- The Lifetime ISA – abbreviated to LISA. For 18 to 39-year-olds and designed to help with first home purchases or saving towards retirement. For every £4,000 you save, the government adds £1,000 to your savings (a £1 bonus for every £4 saved in any tax year).
- The Stocks and Shares ISA – sometimes referred to as an Investment ISA
The is a Junior ISA also known as a Junior Cash ISA or a Junior Stocks and Shares ISA.
All types of ISAs are known in the trade as tax-free wrappers, as long as you stay within your annual ISA savings allowance, which is explained further below.
A tax wrapper is a kind of tax break that you can wrap around your investments to shield you from having to pay any or some tax on your savings. ISAs and pensions are the two most common types of tax wrappers.
Pensions are another subject. This article focuses on ISAs and the Cash ISA in particular.
Who Can Open ISA Accounts
To open a UK Cash ISA or any other type of UK ISA, you must be 16 or 18 years of age (depending on the type of ISA) and be a UK resident. The other qualification includes being a “Crown Agent” living aboard, such as a diplomat or a civil servant working overseas, or their spouse or partner living abroad.
An individual can not open an ISA with or on behalf of another person. There are two exceptions to this rule- opening a Children’s Cash ISA or a Cash ISA for someone who is mentally incapacitated. Regarding the latter, you can open a Cash ISA if you are a relative or a close friend by applying to the Court of Protections for what is known as a financial deputyship, which, if granted, will enable you to open an ISA on that person’s behalf.
Your Personal Cash ISA Allowance
Everyone who qualifies for an ISA has an annual allowance. At present, the total yearly allowance for the 2021/2011 tax year is £20,000 per person. You can own more than one ISA, but the £20,000 limit is the total amount you can save across all of your ISA accounts in any one tax year. For example:
- You can pay £20,000 into a Cash ISA or a Stocks and Shares ISA.
- If you have a Help to Buy ISA initiated before the 30th of November 2019, you can pay as much as £1,200 in the month you make your first deposit, plus £200 per month until the 30th of November 2029. Please note, however, that an H2B ISA is viewed as a Cash ISA, so you can only pay into one or the other in any tax year.
- The maximum you can pay into a LISA in any tax year is £4.000.
If you pay into a Junior Cash ISA, the annual allowance is capped at £9,000. Any number of people can contribute to a JISA as long as the total contribution in one year does not exceed £9,000. If the total contribution exceeds £9,000, the excess amount is put in a savings account for the child. Excess payments cannot be returned to the donor.
The money you pay into a Children’s Cash ISA does not affect your personal ISA allowance.
One closing thought on your personal annual ISA allowance is that if you do not use the full £20,000, any unused balance is lost. It cannot be carried forward to the next tax year. It is a definite case of “use it” or “lose it”.
How Many Cash ISAs Can I Have?
You can have as many ISAs as you like, but you can only open one of each type in any one tax year. So, in theory, you could open one of each type, but of course, you can only pay a total sum of £20,000 across all types.
What is a Cash ISA?
You already know that a Cash ISA is a tax wrapper. It protects any savings in the account and any interest it accrues from the taxman.
There are three main types of Cash ISA:
- Cash ISA with Instant Access
- A Regular Savings Cash ISA
- A Fixed-Rate Cash ISA
Typical Cash ISA Rates
Instant Access Cash ISA, you can pay money in or take it out when you want to, although some providers may stipulate terms and conditions. The interest rates offered depends on the product and the provider, but generally, rates are low, typically around 0.67% at the time of writing.
Regular Cash ISA savings accounts offer a fixed interest rate over a given period providing you deposit a certain amount of money each month. Interest rates are significantly better than Instant Cash ISAs – generally up to around 2.35%.
Fixed-Rate Cash ISAs offer better interest rates the longer the fixed term. Typically a 1-year fixed term will give you a 1% rate of interest, 2-year: 1.2%, 3 and 4-year: 1.4%, and 5-year: 1.75%.
As you can see, when it comes to cash ISA rates, the longer the term, the better the rate. Instant or easy access ISAs usually offer lower interest rates than their fixed-term cousins, and the rates they offer are variable.
What is a Flexible Cash ISA?
People sometimes think that a Flexible ISA is another type of ISA. It isn’t. However, it is something that became available as an option in 2016. Flexibility refers to being able to withdraw a certain amount of money and repay it in the same tax year without affecting your personal ISA allowance.
It can be applied to Cash ISAs, Stocks & Shares ISAs and Innovative Finance ISAs. However, it is up to individual providers whether they offer this service.
How Does a Cash ISA Work in terms of Interest?
As already mentioned, any interest your Cash ISA makes is free from tax. You are also now aware of the various levels of interest concerning the different types of Cash ISA account you have. But how is the interest applied? For example, does it just apply to the amount of money you pay in one year?
You will be pleased to hear that any Cash ISA UK account attracts compound interest. In other words, it is the total amount of money you have in your account at the end of the year to which the rate of interest is applied, and this happens year on year, providing accelerated growth.
How Much Can You Put in a Cash ISA?
As previously stated, you can put £20,000 into one Cash ISA per annum or split the total between the various types of ISAs you hold. But if you are asking yourself, how much I can put in a Cash ISA in total, it is £20,000 per annum over your lifespan, or up until the point you decide to withdraw your savings. There is no set Cash ISA limit.
Cash ISA vs Stocks and Shares ISA
The big difference between a Stocks and Shares ISA vs Cash ISA is the potential interest the accounts can earn. You’ve seen examples of the interest the various types of Cash ISAs attract, and they are relatively low. On the other hand, a Stocks and Shares ISA can earn significantly more interest.
Research shows that over the past 10 years, the average total return on Cash ISAs was 6%. Across the same period, the FTSE 100 returned 58%, while its American cousin, the S&P 500, returned 310% in pounds sterling.
If this piques your interest, you can initiate a Cash ISA transfer to a potentially more lucrative Stocks & Shares ISA. Before you do, however, you need to consider the risk. When investing, there is always the risk that you might not recover your full investment. On the other hand, a Cash ISA is more safe and secure as far as risk is concerned.
It’s best to seek professional advice from a wealth management specialist.