“For a few years, there’s been little point in most savers considering cash ISAs. Now they’re back on the table,” he wrote in his weekly newsletter.
This is how he explained it to readers.
“Until April 2016, my constant refrain was ‘your money is nisa in a cash ISA’ – as a cash ISA is just a savings account you can (now) put £20,000 a year in, and the interest is tax-free,”
“Then the personal savings allowance launched, meaning 95% of people no longer pay tax on savings interest anyway.
“And as the top cash ISAs started paying significantly less than the equivalent normal savings, that meant most people shouldn’t bother with them. Until now…”
The biggest change was the launch of a cash ISA that paid as much as the top instant access savings accounts.
Currently, you can earn up to £1,000 a year in interest before it gets taxed if you’re a basic rate taxpayer and £500 if you’re a higher rate taxpayer. People on the highest band of income tax – making more than £150,000 a year) – don’t get any allowance, however.
But interest earned on money you have on an ISA is always tax free.
Of course, at current rates you need an AWFUL lot of money saved before you breach that limit – more than £60,000 in most cases if you’re a standard rate taxpayer.
That meant ISAs mattered less than they did before.
But in a situation where the rates are the same, there is still an advantage to ISAs.
That’s because if savings rates go up, or your savings build over time, you could end up paying tax on your savings outside the protection of an ISA.
On top of that, if you end up earning more, you could also see your savings allowance cut – possibly to nothing.
But if you need to transfer your savings into an ISA fast to avoid tax, you could be in trouble as you’re only allowed to move £20,000 a year into an ISA.
That might seem a lot, but if you’ve been saving for several years, it’s possible.
So, if the rates and terms are the same, it’s simpler to just put your money in an ISA straight away.
And that time has just come.
“Finally, a cash ISA launches with a rate the same as the top comparable normal savings,”
“As it’s easy access you can withdraw when you want, and it’s flexible, so if you do withdraw, you can return the money in the same tax year with no impact on your £20,000 ISA allowance.
“Even if you don’t pay savings interest tax now, in case something changes in future, you may as well grab it if you want easy access, as the rate is the same as an equivalent non-ISA.”.
“It’s a variable rate, so it may drop in future. If it does or normal savings get significantly better, you can just move your money,” he said.
“Unless you pay tax on savings, don’t stick with Coventry if the rate drops.”