Is a Cash ISA the way to save money?
Anyone who is serious about saving money, and who has a spare fiver, should have thought about an Individual Savings Account (ISA). On the face of it, it’s a way to save money, or make investments, and keep all of what you make- the taxman doesn’t get his grubby mitts on any of it. But like most things that seem to good to be true, are ISAs all they are cracked up to be?
ISAs were introduced to encourage people to save money rather than spend it. Of course, back in 1999 everyone had Loadsamoney, and the Government were keen to get people to save for the future. Replacing the separate PEPs and TESSAs, ISAs allow you to save cash or make investments, tax-free. Non-Cash ISAs allow you to invest up to £11,280 (2012/13 figure) per tax year and investments within an ISA wrapper grow free of tax- although dividend tax credits suffered cannot be reclaimed, any capital growth normally subject to capital gains tax is tax free. This means that, over the long term, you could end up with a nice lump of tax free cash. Which is always nice.
But we're not talking about investment ISAs, we're looking at cash ISAs.
Cash ISAs work like a bank account and you can invest up to £5,640 (2012/13 figure) per tax year. The figure currently changes every year to keep pace with inflation, and is divisible by 12 to help those who prefer to save monthly. As the 2012/13 tax year ends on 5 April, ISA providers are starting to up their rates to encourage you to invest your cash with them this year.
However, owing to the microscopic base rate of just 0.5%, savings rates for investors have been low for some considerable time, and the Government’s recent Funding for Lending scheme (which basically gives banks money to lend out for free) means that banks don’t even need deposits to fund their lending business. This means rates have fallen even further, and ISA rates with them. Add to this a higher-than-target inflation rate, and there are few savings accounts that generate a real return, even when there is no tax deducted.
Latest figures from moneyfacts.co.uk show only one variable rate cash ISA that beats the current CPI inflation rate of 2.7% (Coventry Building Society at 2.80% with 60 days notice). If you want a guaranteed rate, you need to look at fixed rate, fixed term cash ISAs, but you would have to agree to tie your cash up for at least four years to even get a rate matching inflation. Looks like saving isn’t such a great idea and we'd better all go spend our money and kickstart the economy instead.
But at least if you’re not getting taxed on the interest, you have to be better off investing in an ISA account rather than a normal account that suffers 20% tax deduction on the interest before you even get it?
Up until recently, this wasn’t actually true- you could access a number of savings products that gave you a better rate even after tax than you could get through an ISA account. And if ISA rates were therefore lower than standard rates, who exactly was benefitting from the tax relief? Clue- it is either the deposit account holder or the bank, and it’s not the account holder. Now, however, unless you look at regular savings accounts, the rates are pretty dismal everywhere, and the tax relief on an ISA does generally make a difference.
Depending on where you live, and how much effort you are prepared to put in, you can get ISA-beating rates for regular saving. If you’re willing to tie money up for up to 11 months, you can get 5% from Cheshire providing you can save £100 a month, far less than the maximum ISA limit. Even after tax, that gives a basic rate taxpayer 4% and a higher rate taxpayer 3%. However, you do have to get to a branch. And they are all in and around,well, Cheshire. If you only have £10 a month, you can still get 4.10% (3.28% net) from the West Brom. But again, only in branch (West Bromwich is in Birmingham). Other regions are available at decreasing rates of interest. The highest nationally-accessible account is a postal account with Principality at 3.50%, which nets down to the ever-so-slightly higher than inflation 2.80% for basic rate taxpayers.
However, if you can think more creatively, and see a current account in a different light, you might want to think about saving into a Halifax Reward account. So long as you pay in £1,000 a month (and you can take it straight back out again) they will give you £5 a month net. That’s roughly the same as investing a £2,200 lump sum into a 2.80% ISA for a year. Until 3 March, if you switch over some direct debits and your salary (which again you can take straight back out if you want to) as well, they will give you a switching bonus of £100. Which would be like saving £5,714 in that cash ISA (which is impossible when the limit is £5,640).