Cash ISAs

A cash ISA allows UK individuals aged 16 or over to save money and receive interest free of tax.

Unfortunately, if you don’t use your ISA allowance each tax year, you lose it. This means that it makes sense to maximise your cash ISA allowance before repaying the mortgage.

If circumstances allow, try to avoid withdrawing money from a cash ISA for as long as possible.  Ideally, you should let your savings accumulate over the years, opening new cash ISAs each year and allowing the effect of compound interest to work its magic.  This means that shopping around for the best cash ISA deal will invariably involve two searches:

  1. Identifying the best cash ISA for the current year’s allowance, and
  2. Identifying the best cash ISA that accepts “transfers-in” of previous years’ allowances.

It is often the case that the best rates only last for a fixed period, with better rates offered if you tie-up your money for longer.  Generally speaking, the better the rate of interest offered, the more conditions will apply regarding accessing your money and/or depositing money.  Banks and building societies often rely on customer inertia – they may offer competitive rates for one year to attract new business, only for that rate to plummet after the promotional period.  Loyalty rarely pays these days – take advantage of favourable rates while they last, but then shop around as they expire.

To summarise:

Step 1 – Identify the best cash ISA for the current year’s allowance, making sure that you fully understand the terms and conditions of this account.

Step 2 – Make a note of when any promotional rates and/or conditions end, so that you’ll be ready to transfer your money quickly as per step 3.

Step 3 – Identify the best cash ISA that accepts “transfers-in” of previous years’ allowances, again making sure that you understand the terms and conditions and noting when any promotional rates and/or conditions end.

Step 4 – Try to avoid withdrawing money from a cash ISA for as long as possible to get the full benefit of compound interest.

Sadly, interest rates on cash ISAs and the vast majority of cash savings accounts are, quite frankly, pathetic. I’m afraid that if you wish to get any reasonable return on your money, you are going to have to take some risk by investing it.

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