The cash ISA, also known as the Individual Savings Account, was introduced on April 6th 1999 to replace Personal Equity Plans (PEP's). They are a form of tax-free savings. Individual Savings Accounts are broken down into two separate elements; cash ISA's and stocks and shares ISA's. An investor can put up to £10,200 in a stocks and shares ISA or £5,100 in a cash ISA and £5,100 in a stocks and shares ISA from April 6th 2010. With the exception of over-50's, the figure is currently capped at £7,200.
Advantages of Cash ISA's
- Tax-free savings. It is possible to invest up to £5,100 in tax-free savings. This is particularly beneficial to higher-rate tax payers.
- ISA transfers. Investors are able to search the market for the best ISA accounts. It is possible to perform an ISA transfer to a higher yielding account.
- Building a nest egg. Many first-time buyers use them to save money for a house deposit, a dream holiday or a retirement fund.
- Access. It is possible to pay money into a cash ISA at a local bank or online. Withdrawals are also straight-forward and can be performed instantly and without penalty, provided funds haven't been locked in a fixed-rate cash ISA.
- Compound interest. Long term investors can benefit from compound interest. This can help build-up a substantial sum of tax-free savings.
Disadvantages of Cash ISA's
- Deposit limits. Tax-free savings are strictly governed by the Inland Revenue. A maximum of £5,100 can invested in any single tax year.
- No more than one cash ISA. Inland Revenue rules don't permit investors to open more than one account in any single tax year. This means that it isn't possible to invest £2,550 in a variable rate account and £2,550 in a fixed-rated cash ISA at different financial institutions.
- Withdrawals. Once money is withdrawn, it cannot be replaced without using the remaining ISA allowance. If no allowance is available, it is necessary to wait until the next tax year before further tax-free savings become available.
- Low interest rates. Even the best ISA accounts are offering unattractive interest rates on personal savings because bank base rates are currently low.
- Fixed rate ISA's. Some investors have locked-in at unfavourable rates. It isn't possible to perform an ISA transfer without incurring a penalty.
A cash ISA is an flexible way of benefiting from tax-free savings, especially for higher-rate tax payers. It is possible to perform an ISA transfer to the best ISA account, but this can take in excess of 30 days. Interest rates are low currently so use a comparison service to identify the most competitive rates. Investors may opt for a stocks and shares ISA in order to maximise returns.
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