Advantages and Disadvantages of Cash ISAs

Cash ISAs are tax-advantageous savings accounts, where income tax isn’t payable on the interest earned. These individual savings accounts are limited to one per person each year and have a pre-determined savings limit, which can be a mix of cash and/or stocks and shares.

The financial year runs from April 6 to April 5. In this tax year, 2011-12, the limit is £5,340 and this amount is raised every year in line with inflation.

Those who have put money in stocks-and-shares ISAS will find their cash ISA allowance reduced, as the total savings amount is £10,680 maximum. It’s also possible to transfer in money invested in ISAs from previous years without losing the tax-free status, but only for those products that allow transfers.

The Advantages

There is a wide range of cash ISAs to choose from, including fixed-rate bonds, regular savers and easy-access accounts. The main advantage is that tax savings can be significant with ISAs, especially for those who build up large holdings over several years. This can be particularly valuable for those who pay higher rates of tax.

Those who take out the most competitive ISA every year will save many thousands of pounds over the long term compared to those who save using non-tax-advantageous products. They are open to everyone over the age of 16 but the government this year also issued Junior ISAs for children.

The Disadvantages

Less positive aspects of cash ISAs are the capped allowance rates, which cannot be exceeded and the fact that not all accounts accept previous-year transfers. Additionally, the accounts offering the highest interest rates only offer these for the current year’s allowance and you may need to be switch to more competitive products in later years. Take care, though, as you can only transfer ISAs between providers using their process. If you withdraw it, the money automatically loses its tax-free status.

The current set-up isn’t as flexible as it could be either. For example, you can transfer cash ISAs into stocks-and-shares ISAs, but not the reverse. Finally, money withdrawn from an ISA can’t later be paid back into it – once it’s withdrawn, it’s withdrawn for good.

Finding the Right ISA

Use an online comparison site to find the best and latest deals – interest rates change each year and new products are launched all the time. Remember to review your ISA portfolio regularly too if you have several years worth of subscriptions, as the subsequent interest rate after the initial first-year promotional rate can be decidedly lower.

It can also be worth seeing professional help from a financial adviser with regards to your long-term planning goals and objectives and to understand whether a wholly cash ISA is right for you or a mix of cash and stocks and shares.

In Conclusion

ISAs are a very useful savings product for those who wish to enjoy tax-free savings, especially for those who pay income tax. They are quick to set up and there is a wide range of different ISA types available, offering various interest rates and benefits. They can be a useful long-term savings vehicle and some people use them as an addition to their pension plans to build up a sizable lump sum for the future.

 
Simon OatesAdvantages and Disadvantages of Cash ISAs