Money saving expert Martin Lewis says if you have a certain type of savings account then it's probably time to ditch it. In a piece he recently put together for the Daily Express Mr Lewis said the days of cash ISAs are gone.
He said there was a time when he'd be urging savers to use their new tax-free cash ISA allowance as there was a time when "money was nicer in an ISA". But it was in 2016 that everything changed, according to Mr Lewis.
This was when the Personal Savings Allowance (PSA) launched and things began to alter. It means:
- Basic 20 percent rate taxpayers can earn up to £1,000 interest a year from any and all savings without paying any tax on it; after that their interest is taxed at 20 percent.
- Higher 40 percent rate taxpayers can earn up to £500 a year; after that their interest is taxed at 40 percent.
- Top 45 percent taxpayers don’t get a PSA – all their interest is taxed at 45 percent.
He said, for most people, this is a huge amount of tax-free interest. The money advisor claimed that, even when you look at today's stand-out top easy-access 1.5% rate from app-only bank www.chase.co.uk, you'd still be required to have around seventy grand saved to generate £1,000 interest.
This is why most people - over 19 in 20 – don't pay tax on savings interest anymore, he claimed. Nowadays the ISA's main benefit is that interest from it doesn't count towards the PSA - it’s still tax-free on top of that.
What this means is for the few with savings, or earnings, at an amount that's great enough to break that limit, it's a winner, as they're able to protect more interest from tax.
Martin Lewis said : "You get a £20,000 ISA allowance each tax year, and, crucially, money you put into an ISA stays tax-free year after year. Yet for most, there's no benefit of saving in a cash ISA – so you simply should focus on getting the highest interest rate. Over the last few years, cash ISAs have tended to have worse rates than normal savings across all categories."
He said these were his findings at the time of writing:
- Top easy access: Cash ISA 1.05 percent v Normal Savings 1.5 percent
- Top 1-year fix: Cash ISA 1.4 percent v Normal Savings 1.96 percent
- Top 2-year fix: Cash ISA 1.75 percent v Normal Savings 2.21 percent
The rates change every day, so you should visit the website for his latest updated advice. Mr Lewis continued: "So most should ditch cash ISAs for accounts that pay more. When I polled this on Twitter recently (@MartinSLewis), I found 85% of the 9,000 who said they had cash ISAs don't pay tax on savings.
"So why keep them? I know for years many had it drilled into them (often by me) that cash ISAs were nicer – but now people need deprogramming and pushed to just focus on the highest interest rates which come from top normal savings. Be brave, ditch the cash ISA and earn more."
He did point out, however, that there are a few unique reasons why some people may wish to keep a cash ISA. In his own words, these include:
- If you're close to paying tax on savings. If you've a good whack of savings and are close to the limit where you’ll pay tax, as interest rates are likely to rise, keeping money in cash ISAs now can protect you from future tax.
- You can withdraw from fixed cash ISAs (unlike normal fixes). There are big interest penalties for doing so but, if you could get a good cash ISA fix rate and wanted access in an emergency, they are more flexible.
Even though cash ISAs aren't a great option for most, other ISAs have benefits. For example, Mr Lewis said if you're a first-time buyer and are aged between 18 and 39 it can be worth taking a look at the Lifetime ISA.
This is because you can save up to £4,000 a year in it, and once it has been open a year, and it's being put towards a qualifying first home (one costing up to £450,000) you can also bag an unbeatable 25% boost on top. This means there’s up to £1,000 a year of free cash available.
Obviously there will still be positives and negatives though, so make sure you read all the advice available. Not to mention, if you're looking to invest, a stocks and shares ISA also offers actual tax benefits for many, whereas cash ISAs don't.
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