On the BBC’s Ask Martin Podcast this week, the money saving expert discussed cash ISAs and whether people should keep their savings in them. With the new tax year underway, he explained that people should “very rarely” be considering cash ISAs as an option.
He said: “Most people who have cash ISAs should be considering ditching them, which people may find strange because before I have said, ‘Your money is nicer in a cash ISA.’
“Because until 2015, a cash ISA meant that your savings were tax free and most people paid tax on their savings.”
Martin explained in 2016, the Personal Savings Allowance (PSA) was introduced.
“The PSA means that now, few savers actually pay tax on savings interest.
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“This is because if you’re a basic 20 percent rate tax payer, you’re allowed to earn up to £1,000 interest in savings before it is taxed.”
He explained that Britons with money in the top easy access account paying 1.5 percent would need around £60,000 to £70,000 in their account to earn £1,000 worth of interest.
He continued: “The only people who are basic rate tax payers who are going to pay tax on their savings have you need over £60,000/£70,000 in your account before you pay tax and most people don’t have close to that.
“Fewer than one in 20 people get close to that.
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“Higher 40 percent tax payers can only earn up to £500 a year interest before being taxed.
“If you’re lucky enough to be a top 45 percent tax payer earning over £150,000, you don’t get this.”
The main benefit of a cash ISA is that the interest people can earn on them is not taxed and doesn’t count towards the PSA, but this is irrelevant, Martin said.
He added: “For most people the question is, ‘Do cash ISAs pay more than normal savings?’ But no, not even close.
“The top easy access account pays 1.5 percent, top easy access cash ISA pays 1.05 percent, top one year fixed savings 2.1 percent, the top one year fixed cash ISA pays 1.46 percent
“Cash ISA rates are pants compared to the best normal savings.
“The only people who should have money in cash ISAs are those who have enough money to be paying tax on savings.”
The money saving expert mentioned some caveats that people should be aware of.
He said: “A couple of caveats, if you’re near the limit, because interest rates may rise, putting money in cash ISAs could protect you from future tax.
“If you’re happy to lock cash away but may just need access to it, fixed rate cash ISAs do allow you to withdraw money within the term but you have to pay a big interest penalty.
“If you’re sitting out there and you have £10,000 to 15,000 worth of savings and it’s in a Cash ISA, you could earn money by taking it out and putting it elsewhere in normal savings.”
Ask Martin is available to listen to on BBC Sounds.
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