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A beginner’s guide to Cash ISAs

March 13, 2016

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With only a limited amount of time left remaining in this tax year, Cash ISAs are the talk of the town at the moment – and so they should be.

Interest base rates sit at an all-time low which means finding high interest rates on your savings is hard to come by. Hopefully this guide will help convince you Cash ISAs are worthwhile.

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ISA stands for Individual Savings Account. An ISA differs from a normal savings account as the interest gained isn’t taxed. With a normal savings account, basic-rate taxpayers have to give 20% of the interest to the Government while this percentage shoots up to 40% for higher rate taxpayers.

You have to be aged 16 or over to open a Cash ISA account and the financial year runs from April to April. Each financial year, an individual is allowed to put in a maximum of £5,340 cash into an ISA account. If you don’t use the full allowance, it will not be rolled over to the next year.

It’s important to spend time finding the right Cash ISA that suits your situation as offerings differ; the last thing you want is to be restricted access to your savings when you need it.

First thing to do is to decide how much access you really need to your savings. Some offerings penalise you for taking money out of the account, while others need a months’ notice. If you do need frequent access or would like that safety net, Easy Access Cash ISAs are perfect. Offering great flexibility, this account normally allows you to withdraw money freely without incurring penalties, just like a day to day bank account.

Withdrawing money will mean losing some of your £5,340 allowance however. For example, you have saved £1000 in your account, you withdraw the £1000 so your new allowance is reduced to £4,340.

On the other hand, if you are saving for the long term and don’t need access, fixed Cash ISAs are best. Although your money is locked for a number of years, you do receive a higher interest rate than Easy Access ISAs in return. The number of years you can choose from varies between 1-5 years. The interest rate increases if you choose to save for a longer term.

Bonuses are another aspect to take into consideration. You may think you’ve seen a great interest rate, chances are it’s a short term bonus. What this means is for a short period of time, the bank will inflate the Bank of England base rate, 0.5% at the time of writing.

For example, a bank may give a bonus of 2.5% interest, meaning their account offers 3%. However, this will usually be for 12 months only, after the second year the interest rate returns to the Bank of England base rate. There is of course nothing to stop you from changing after the 1st year to another bank, many people do this, but it can save the hassle choosing one without a bonus rate. It can be easy to forget after a year.

With only 23 days left make sure you use the £5,340 allowance. For further information on the best current rates, Money Saving Expert and This Is Money have frequently updated tables to compare the current market.

Do you think ISAs are a good way of saving for those rainy days? Tell me what you think in the comments below.
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