5 Minute Guides To:
Cash ISAs
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Last update : January 2010
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A Cash ISA is a savings account held with a bank or building society. Interest is then paid on the amount saved and this interest is tax-free which is the main selling point of ISAs.
ISA stands for Individual Savings Account.
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| How much can be saved within an ISA |
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At the moment up to a maximum of £3,600 can be paid into a Cash ISA in any one tax year, which runs from the official tax year date of April to April. However from 6th April 2010 this amount will be raised to £5,100.
The minimum amount to invest in a Cash ISA is usually £10 which makes them suitable for all savers, but you do have to be over 16 to qualify for an account.
An important point to remember with a Cash ISA is that once money has been withdrawn it cannot be then replaced later in the year. For example -
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- You pay in the full amount of £3,600 in May
- Then withdraw £500 in November with a view to replacing it by March just before the end of the tax-year (April)
- However, this is not allowed as ISA money once paid into the account cannot be replaced
- So if you need access to cash it is important to only use your ISA savings as a last resort, ie if possible withdraw money from other accounts first
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| What is a Stocks & Shares ISA |
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The word ISA is an umbrella term for 2 separate tax-free accounts -
- A Cash ISA, and
- Stocks & Shares ISA - as the name suggests this style of tax-free account is designed for holding shares, bonds and other similar types of investments. A detailed explanation of Stocks & Shares ISAs is available here
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| Advantages |
- Tax-free - saves 20% for basic rate taxpayers and 40% for those who pay tax at the higher rate
- Easy access to your money (but not if held in Notice Accounts)
- No need to tell the taxman about income and capital gains from ISA savings and investments
- Guaranteed not to lose money with Cash, unlike shares where they can easily fall in value
- Available to anyone aged 16+ which is good as hopefully it will encourage saving at an early age
- New £5,100 limit - Available from 6th April 2010
- Simple products - When it comes to Personal Finance the simple products are normally the best as the banks can't hide any potential disadvantages in the smallprint - See secret number 3 - Buy simple and flexible which is one of this site's 10 Secrets to Good Personal Finance
- Internet banking - Most of these accounts come with internet banking and which is a great way to efficiently manage your money and financial commitments. Personally I love internet banking. See: 3 easy steps to safer internet banking
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| Disadvantages |
- Is the tax-free advantage so much of an advantage? If a Cash ISA account has £500 then the savings on the interest would amount to a few pounds at most. Not so much to get excited about
- Transferring can be messy - Sometimes transferring from one ISA provider to another (at different bank or building societies) can be complicated and time-consuming. Plenty of horror stories over the last few years where transfers have taken months - see this FAQ if you are experiencing ISA transfer problems
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| Where to buy |
| All banks and building societies offer Cash ISAs and this includes the Government Savings arm - National Savings and Investments (NS&I).
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| How to buy |
| As easy as opening any other savings plan and most accounts can be opened either online, via the phone or in branch.
Overall the account opening procedure is normally simple although you might be required to send some ID to the bank or building society in question.
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| Most ISAs are Instant Access style |
| Cash ISAs are also flexible and most of them are instant access. They can therefore be used to save for the long-term, or to save for a specific purpose, perhaps to buy a new TV or Car, or just to save for an emergency. You are in control of your money with a Cash ISA and so you choose how to run your account. |
| Notice and ISA fixed rate bonds are also available |
| While not as common as an Instant Access Cash ISA, some banks and building societies also offer Notice and Fixed Rate ISA bonds.
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| The best type of account to use depends on whether you'll need access to your money.
If this is likely then always go for flexibility rather than a higher interest rate which would mean an Instant Access account. But if you won't need quick access to your money, even in an emergency, then look for a higher interest rate with reduced flexibility.
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| Buying tactics |
| ISA interest rates are not always the best |
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One problem with ISAs is the interest rates are often so-so at best, especially for the Instant Access accounts. But for Notice or Fixed Rate Savings Bonds the rates can be far more competitive.
However, the trick to finding the best deals is to look at our Top 3 Savings deals which is updated every Monday and has details of the current best Cash ISA deals.
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| Not all Cash ISAs allow what's called 'Transfers In' |
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A transfer in is where you currently have Cash ISA money with one bank and want to move your money to another. Seems a simple enough request but not all banks allow this. Some of their ISA accounts are only for new ISA money so you can't move money already held in an ISA from a different bank.
Check on this if you want to move any cash.
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| LearnMoney.co.uk comment: |
| Cash ISAs are a good products for savers. In fact, if anyone has savings they should put them into an ISA before any other savings account.
There is an argument that if you've got small savings, say under £2,000, the tax-free aspect will hardly be worth it. This is true, but the account opening procedure for an ISA account is no different to that of a standard deposit account so it is worth doing if you can find an ISA offering better rates.
Finally, if there's a trick to using ISAs then try to think long term and aim to build your cash savings over many years. If you can do that the tax-free advantage starts to shine.
PS. Don't forget that every Monday we publish our Top 3 Savings Accounts which includes the best of -
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