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Cash ISAs

These are predominantly deposit based savings accounts offered by bank and building societies. The advantage over an ordinary savings account is that they are not subject to income tax. Therefore if the interest rate was 3% you would receive the whole 3% as interest.

The investment for Cash ISAs used to be limited to half the total ISA allowance for each tax year. However, as from July 2015, you are now permitted to hold your full ISA allowance in cash. This means that in the current 2017/18 tax year, you can hold anything up to £20,000.00 in a cash ISA.

The table below shows the tax savings from a Cash ISA on a £20,000.00 investment at 3% interest compared with an ordinary savings account.

Banks and Building Societies have always offered higher interest rates to larger deposits through tiered interest rates. Investors should therefore consider consolidating their Cash ISAs into one simple account.

For many investors the Cash ISA is their first port of call as they are readily available on from most high street Banks. However, before automatically looking at Cash ISAs, investors should consider their objectives. We generally would recommend that investors should place their best returning investments inside an ISA. This is based purely on the thought that we would rather avoid paying tax on something that has the potential to earn 7% than something that is limited to the returns offered by deposits. History has shown that fixed interest and equity based investments outperform deposits and inflation over time.
 

By increasing the annual ISA allowance to £20,000.00, the Government has firmly placed ISAs as a core part of retirement planning. Over a 20 year period, without considering capital appreciation or increases in the annual allowance, it is possible to accumulate a lump sum of £400,000.00 (£800,000.00 for a couple). This lump sum can grow free from the constraints of capital gains and income tax and is capable of providing a tax free income at any chosen retirement date, regardless of continued increases of minimum pension age, currently 55.

Furthermore, it provides added benefit of instant access at any time during your life to deal with personal cash flow issues or provide an income during periods of ill-health. Though some thought needs to be given as the funds build that they will still form part of your estate and will be subject to inheritance tax, unless you take advantage of investments with the potential for business property relief.

There are some institutions that offer structured products such as Guaranteed Income Bond [GIBs] and Guaranteed Equity Bonds [GEBs] inside an ISA account. These offers the investor the potential for equity style returns, however the liquidity offered by deposits are lost and sometimes this may mean locking your capital into the product for 3 to 6 years.

All savings interest is now paid gross to investors. To offset this, the government has introduced the personal savings allowance. The table below shows the pros and cons of using a cash ISA after all allowances have been taken into consideration.


Non Taxpayer

Basic rate Taxpayer

High Rate Taxpayer

Additional rate Taxpayer

Cash ISA

£600.00

£600.00

£600.00

£600.00

Savings Account

£600.00

£480.00

£360.00

£330.00

Tax saving

Nil

£120.00

£240.00

£270.00

 
 
 
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