Cash ISAs (Part 1)
Part of The Ultimate Guide to ISAs in the UK series.
In my previous article, I mentioned that Cash ISAs would be the first ISA I would discuss due to their current hot topic amongst the industry and government. But before we look at all the noise, we should get to really know what a Cash ISA is and the different types of Cash ISAs.
What is a Cash ISA?
A Cash ISA is a form of savings account. The main difference between a Cash ISA and a regular savings account is that you can deposit money and earn tax-free interest. This can help grow your savings without having to pay tax on them. Like other ISAs that we talked about in the previous article, Cash ISAs count towards your overall ISA allowance. You can open multiple Cash ISAs with different banks, building societies and investment apps, but ensure all your ISAs are not exceeding £20,000.
Within Cash ISAs, there are also different types of Cash ISAs. The different types of Cash ISAs are:
Instant Access Cash ISAs
Fixed-rate Cash ISAs
LISAs - a separate article will go into detail on this
Flexible ISAs
Instant Access Cash ISAs
As the name implies, this type of Cash ISA allows you to withdraw (instantly access) your savings accounts without facing any withdrawal penalties. This Cash ISA is ideal for those saving for an emergency fund. The downside of this type of Cash ISA is that it will provide the lowest interest rates. Interest rates are extremely vital to Cash ISAs as it is how you generate income from them.
The two main goals of both saving and investing are to firstly beat inflation and secondly, generate returns. You will generate nominal returns with Instant Access however, you may actually lose the real value of your investment.
Source: BOE
One of the many roles of the central bank of the UK, the Bank of England (BOE), is to set the bank rate (interest rate) and calculate the current inflation rate. As we can see, the current inflation rate is 3%.
Source: Barclays
Barclays currently has an Instant Cash ISA with an AER (interest rate) of 1.26%, which is way lower than both the current inflation rate and the target inflation rate of 2%.
Fixed-rate Cash ISAs
These types of Cash ISAs will have both a fixed interest rate and a fixed time you will have your savings locked - in other words if you decide to withdraw any amounts from this account, you will incur a withdrawal charge fee. The withdrawal charge is dependent on your balance and the percentage stated by the bank, building society or investment platform. This information will be disclosed in the Terms and Conditions.
Typically the time duration for these accounts is a tax year or more so 12 months, 18 months, 2 years etc.,. Since you forgo the aspect of withdrawing any amounts, you will benefit from a higher interest rate.
Source: HSBC
An example is HSBC’s Fixed Rate Cash ISA. The interest rate is 4.15% which is higher than the inflation rate and the period is for 13 months. This means you will beat inflation - providing inflation does not exceed 4.15%. Note that this specific Fixed Rate Cash ISA though requires you to deposit a minimum of £500 and currently hold an HSBC UK Current Account.
Flexible ISAs
Flexible ISAs allow you to withdraw without affecting your ISA allowance, providing that the money is replaced within the same tax year and back into the same ISA. Similar to Instant Access, they tend to have lower rates than Fixed Rate Cash ISAs but they have higher than Instant Access.
Part 2
Now that we have looked at the different types of Cash ISAs, in Part 2, we will look at what industry experts think about the future of Cash ISAs and any potential reforms surrounding this investment account. We will also look at why the BOE’s bank rate (interest rate) is vital to Cash ISA savers and how tomorrow, the Chancellor’s Spring Statement will affect Cash ISAs. Part 2 will be released after the Spring Statement. As we wait, below is an insightful video by Peter Komolafe, a qualified financial and mortgage adviser, on his Conversation of Money YouTube channel, discussing the threats of Cash ISAs.
Disclaimer: The information in this article is for general informational purposes only and does not constitute financial, tax, or investment advice. While I strive to provide accurate and up-to-date information, financial regulations and interest rates may change. Always conduct your own research and consider speaking to a qualified financial advisor before making any financial decisions.