Which is Best? How do I choose?
All UK citizens have access to a ISA (individual savings account) allowance. Cash ISAs are a type of ISA which holds cash, you can deposit up to a certain amount into it and receive interest tax free.
Cash ISAs were first introduced in 1999 to replace other tax-exempt accounts. They were created to be available to a wider range of people and more accessible. They have changed considerably since 1999. Notably, several variations of cash ISAs have since outlived their worth or else been scrapped.
When looking for a cash ISA it is important to check how they will perform after the first year, when rates can fall away. Checking through ISAs to see which is best in the long term can be a daunting task. Fixed-rate ISAs will guarantee a rate of return, but offer severe interest penalties for withdrawal. For instant access cash ISAs, see our post on how ISAs perform after one year to help you understand the best long-term options.
Currently the best cash ISA available is the Nationwide at 3.1%.
What should I remember when opening a cash ISA?
The most important rule is the annual cash ISA allocation. The limit of £5,340 per tax year includes all deposits regardless of withdrawals. Therefore, should you deposit £1,000 and then withdraw it again, your maximum limit has still reduced to £4,340 (for the same tax year). Should you ignore this, you could end up losing out on significant tax advantages.
Should you wish to transfer your cash ISA from one provider to another to keep up-to-date with the best rates, the new provider must conduct the transfer. Should the account holder withdraw funds manually, they will no longer be counted as tax-free, which would ultimately defeat the purpose of a transfer.