The Blog

Does the Personal Savings Allowance Mean That Cash ISAs Are Dead?

I have spent a large part of my life teaching people how to save and how to make the most of their money. However, it is becoming increasingly difficult to suggest to people where to put their cash when interest rates are still so low. People are working hard to save for their futures but they aren't seeing any extra benefits (other than having a nice stash for a rainy day!). As a nation, we Brits seem to be wedded to cash saving. Whether it is fear of the stock market or a lack of knowledge, I am not sure, but around two thirds of all personal savings and investments are held in cash. Despite poor rates, St James' Place say that a massive 80% of all ISA subscriptions last tax year were deposited into Cash ISAs. As a result, over £240 billion is now languishing in Cash ISAs paying little or no return. According to the Bank of England, the average interest rate on Cash ISAs is currently just 0.85%, meaning that savers depositing their full allowance of £15,240 in a Cash ISA would earn annual interest of just £129. It is ridiculous!

So what are the real benefits of Cash ISAs? Well, every year you can save £15,240 into a cash ISA where the interest earned is tax-free, unlike a standard High Street savings account which taxes the interest at your normal rate. This means that someone with £20,000 in a savings account paying 2% interest, would earn only £320 a year interest if they were a basic rate taxpayer or £240 for a higher rate taxpayer. If the interest was untaxed (like it is in an ISA) then the saver would actually earn £400. It seems like a no brainer, doesn't it?

Next month though sees the introduction of the Personal Savings Allowance where banks and building societies will stop automatically deducting interest from your savings. Basic-rate taxpayers will be able to earn tax-free interest of up to £1000 on standard current and savings accounts and the allowance for higher-rate taxpayers will be £500 and those who earn below £16,800 a year won't have to pay any tax on savings interest. This could certainly make savings account more attractive, especially if you find one with a favourable rate. It seems bonkers but there are even some current accounts which are paying more in interest than an ISA! The Santander 123 is paying 3% on balances between £3,000 and £20,000 (which works out as 2.4% after basic-rate tax, and 1.8% after higher rate tax). Club Lloyds is paying 4% on balances between £4,000 and £5,000 and Nationwide and TSB are offering a massive 5% on balances up to £2,000 or £2,500 respectively. However, it is worth remembering that whilst an ISA guarantees tax-free status on that cash for as long as it's kept in an ISA, interest on a current account is often only good in the short term.

So what should we all be doing? It is a tricky one but I believe that there is still a place for ISAs. Although interest rates have been low for a long time, they will go up again and that's when the £1,000 of tax-free interest in a savings account won't seem so generous. To really maximise your savings, you are best off using a combination of a few different savings vehicles but don't lose your ISA allowance as it may be something which you come to regret.