How can the best 1-year Cash ISA work for me?
You need to act FAST if you want to put some money into a short-term, fixed rate Cash ISA for the 2018-19 tax year.
Some providers need to receive online applications by Thursday 21 March, in order to receive any documents they request from you, and your money, by 28 March.
What’s the advantage of a Cash ISA?
In line with interest rates across the board, the savings rates for Cash ISAs aren’t handsome (generally below 2% across the board). But this is a useful account to have in your savings arsenal:
The interest you’ll earn
- Any interest is better than no interest if you have cash sitting in an interest-free current account.
- Rates for a One-Year Cash ISA are better than Easy-Access ISAs.
- If you’re already paying into a Lifetime ISA or Help to Buy ISA, this is a useful place to put some additional savings that you might want to transfer out later.
- After a year you can choose to take your cash out, and keep the interest tax-free.
- You have more flexibility than with a two or three-year fixed-term ISA (when you may not be allowed to withdraw your cash, or have to pay a penalty if you find you need the cash after a year).
- If you haven’t had time to decide your long-term savings strategy, at least this puts some money away in an ISA “wrapper” for the short-term.
Making use of the ISA tax advantages
- If you’re a big saver, or a higher-rate taxpayer, and you’re over your tax-free Personal Savings Allowance (PSA) on non-ISA savings (£1,000 tax-free interest a year for basic-rate taxpayers, £500 a year for higher-rate taxpayers) this is how to get the same tax-free savings benefits.
- Making use of the “inside the ISA wrapper” advantage: once you have paid into any kind of ISA you can transfer over to any other kind of ISA in later years without it counting as part of your annual ISA pay-in allowance (currently £20,000).
- £1,000 a year in interest earnings sounds like a lot now, when interest rates are historically low, but if interest rates rise it will be much easier for savers to be bumping up against their PSA tax-free limits, in which case having savings already tucked away in a tax-free wrapper will protect you from future tax.
What’s your savings style / “investor profile”?
Your choice of ISA products will depend on your financial confidence, how you make your financial decisions, and how much you want to be involved in your money-management.
You’ll find a number of financial risk profile questionnaires online that will help you clarify what mix of ISAs you’ll be comfortable with.
For the amount of money you’re considering putting into this ISA pot, are you:
Risk averse: you’d rather this money was rock-solid safe than possibly at risk but earning a lot more interest
Hands off: you just want it put this sum of money away, and don’t want to be involved in actively managing it
Thinking short-term: you may need access to this money for bills or family commitments in a year’s time
Understand the interest rate
When you’re looking at comparison tables you’ll see interest rates quoted as Gross (the flat amount paid) or AER (Annual Equivalent Rate – interest compounded over a year).
For a fixed-term one-year ISA, they will be the same.
Remember to ditch and switch
After a year your interest rate on a one-year Cash ISA may revert to a very low rate, or no interest at all. And other ISAs you took out on bonus introductory rates a few years ago may now be performing very poorly compared with more recent ISA products.
Make a note to review your ISA rates regularly, and transfer your savings over to a higher-performing ISA as soon as you can do so without penalties.
And be sure to get the new fund you’ve selected to transfer your savings over. Don’t cash out of the old account and then pay into a new account or the amount you’re transferring will count as part of your annual ISA pay-in allowance.