We explain how to go about finding the Cash ISA that will help you make the most of your tax-free savings allowance.
By opening a Cash ISA you'll be able to take full advantage of your annual tax-free cash savings allowance of £5,340. However, it can be tricky finding the right provider who will offer the right account for you.
Your total tax free ISA allowance for the 2011/12 tax year is £10,680, but only £5,340 of which can be saved as cash. The remainder must be saved in an Investment ISA).
To help you narrow down your choices, there are several key factors that you should take into consideration before opening your new Cash ISA.
- Do you need access to your money?
The type of Cash ISA you open will depend on how often, if at all, you’ll need to access your deposited money. If you’ll need to access your money then choosing a Cash ISA that offers instant/easy access is a must. Alternatively, if you are willing to tie up your money for a number of months or even years then a fixed term option may be more profitable as they tend to offer better returns.
- How frequently will you deposit?
Some prefer to deposit one single lump sum and leave it to accrue interest throughout the tax year. Or, you may like to make several small deposits regularly; either way, this will affect what kind of Cash ISA you choose. Consider too how much you will wish to deposit at a time, as some providers have minimum and maximum thresholds in place.
- How much will you deposit?
You should check if there is a minimum deposit that must be made in order to qualify for this rate, then decide whether or not you are prepared to deposit this amount. Some providers offer a much higher rate if you are depositing larger amounts of money.
- Will you be transferring existing money?
If you are planning to open your account with money transferred from an existing Cash ISA, this will affect which provider you choose. Some providers do not allow you to open a new account with money transferred from an existing ISA. Alternatively, you may simply want to invest new money into the Cash ISA in the future tax year, in which case you’ll be able to pick from a wider selection of providers.
What else should you consider?
- Will you be charged for moving your money?
Many Cash ISA providers place restrictions on how and when you can access your money. So, when you look for a new Cash ISA it's really important to check whether you will be penalised for making withdrawals (there may be a charge or interest penalty, or you may be required to give a certain amount of notice). You should also check whether you will be able to transfer the money in your Cash ISA to an account with another ISA provider without penalty.
- When will your rate change?
Making sure you get the best rate of interest possible is obviously very important in maximising your tax free returns. You have the option of choosing an account with an interest rate that is variable (and liable to fall at the provider's discretion), one that is inflated by an introductory bonus for a number of months, or one that stays fixed for a period of time.
If you choose an account with a variable interest rate you'll need to make sure you check the return frequently and move your money when the return is no longer competitive. If it's an account with an interest rate that's boosted by an introductory bonus you'll need to make a note to move your money when the rate drops. The same applies to an account with a fixed rate/term interest rate.
Staying informed about what you're earning and transferring your money when it's no longer competitive is key in keeping your Cash ISA profitable.
- When will interest be paid?
Some Cash ISAs pay interest monthly, others annually, so choose which one you’d prefer.
What are the different types of cash ISA available?
Just as there different kinds of ordinary savings accounts, there are several different Cash ISAs available. Getting to know the different types will help you to make an informed choice when you come to choosing which Cash ISA to open.
Instant Access/Easy Access Cash ISAs
These are the most basic type of Cash ISA. You can generally pay anything up to your £5,340 allowance into these accounts over the course of the tax year and withdraw it at any time, usually without charge or notice (although it is always important to double check).
However, their interest rates are usually variable or boosted by an introductory bonus which means they are liable to drop quite significantly over time. As such you should make sure you regularly check your return to ensure it remains competitive.
Fixed Term Cash ISAs
Generally when you opt for a fixed term Cash ISA you will be agreeing to tie your money up for anything between one and four years, depending on the account term. This means that you’ll have no access to it; but you’ll benefit from a fixed interest rate throughout that time. It’s useful to bear in mind that accounts with a fixed rate tend to offer a higher rate than those on a variable rate.
Fixed term accounts often only permit a single lump sum deposit when you open the account. They also offer extremely restricted access to your money, usually charging a penalty if you want to move or withdraw your money during the account term, if at all.
Remember that unless you have a Cash ISA with a fixed rate, your provider can cut your interest at any time. Therefore fixed-rate accounts can offer you the security that variable accounts can’t. Conversely, whilst you are on this fixed-rate higher rates may become available elsewhere, but you’ll be unable to switch to them.
Always research the different Cash ISAs currently available on the market, and make sure to read terms and conditions closely in order to find the right account for you.
For more advice on Cash ISAs read our guide Making the Most of Cash ISAs.
