1. What is a cash ISA?
Don't let the name fool you. A cash ISA is just a savings account you don't pay tax on. Better still, once the money is in it, it stays tax-free year after year.
The gain's simple. Earn £100 interest in a savings account and, after basic tax, you only receive £80, after higher rate it's £60. In a cash ISA, you keep the whole £100.
And as an ISA is just a 'savings account you don't pay tax on', just like normal savings accounts there are ones where you can take your cash out straightaway, ones where you lock it in to pay more, and others.
So, as long as rates are similar, ISAs beat normal savings, and as the top ISA rates tend to beat top savings anyway - they're usually a winner.
2. How much can I put into an ISA?
The new tax year started yesterday (6 April), which means every UK over-16 gets a brand new, bigger cash ISA allowance of £5,940 (up to £11,880 stocks and shares).
Yet the big difference this year is that from 1 July, ISAs turn into new ISAs (NISAs) with a £15,000 allowance, and for the first time you'll be able to use all of it for cash.
There's no need to wait though - you can open a new 2014/15 ISA now, then top it up to £15,000 from July.
3. What are the best easy-access cash ISAs?
If you KNOW you need to take your cash out soon, then you need easy-access. Yet these products are changing regularly at the moment. For updated rates see Martin's FULL Best-Buy Cash ISAs guide. Here are the top rates (at the time of writing):
- Santander's 1.6% AER variable Direct ISA (minimum £500) lets you put new money in and transfer old ISAs to up the rate.
- Metro Bank's 1.65% AER Instant Access Cash Isa (minimum £1, allows transfers in) is the top easy-access payer, but you can only get it in-branch, and its branches are all in London.
- Nationwide (minimum £1, no transfers in allowed) is also 1.6% AER variable. New customers will need to apply in branch.
- Halifax (minimum £1, allows transfers in) is 1.55% AER variable. Of this, 1.3% is a bonus lasting a year, so you will need to ditch and transfer then. But the big plus is meanwhile it's effectively a strong rate guarantee.
4. Most should grab up to 2.75% cash ISAs
Unless you KNOW you'll need the cash soon, there are far better deals than easy-access ISAs. Plus, manipulate fixed deals, and they still let you access the cash when you want.
Like all fixed rates, the Coventry BS's four-year fix at 2.75% (min £5,940, no transfers in allowed) is designed for locking cash away. But it allows you to close the account and withdraw early for a relatively low penalty, just 120 days' interest.
A number crunch shows if you withdraw after a year, you'd effectively have got 1.85%, beating the best easy-access deals. After two years it's 2.3%, beating the best two-year fix (except for Santander 123 customers) and after three years it pays 2.45%, which beats the best three-year fixes too.
If you just want to go with a straight fix, Halifax is 2% AER for 18 months and 2.05% AER for two years. Santander 123 customers can however earn more in a two-year fix at 2.3% AER (everyone else will earn 2% AER).
5. What's the best buy for those who want to put money in each month?
Nationwide's new regular saver pays a variable 2.5% AER as long as you deposit between £1 and £1,250 into it each month. You can also make unlimited withdrawals, although you can't transfer in old ISAs.
From 1 March 2015, the maximum monthly deposit limit will be removed, allowing customers who have not fully utilised their full annual ISA allowance to top-up to the maximum of £15,000.
6. Is it worth waiting until July for higher rates?
I'm being asked this a lot as people think providers will launch better deals as there will be so much publicity in July due to the start of NISAs.
However this ISA season (which happens every April when the tax year ends and a new one starts) we've seem virtually no uplift, many providers don't want to top the best buys.
So I wouldn't hold off. If you think there's a chance they'll be better in July, open a top easy access cash ISA now, and you can transfer it to a better rate then (as long as that provider accepts transfers).
7. Are ISAs worth it if bank accounts pay 5% interest?
While cash ISAs easily beat top normal savings, some bank accounts offer up to 5% savings as loss-leaders. So even after tax they can beat the top cash ISAs. However, the more likely you are to get close to filling your cash Isa allowance this year and next year, the more you should hedge towards prioritising doing just that and building up a savings pot protected from the taxman.
One technique would be put your money into a bank account and earn interest there until next April, then move it to an ISA just before the end of the tax year to maximise your allowance.