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Guide to Isas
Your IndustryJun 2 2016

Cash Isas: the staple Isa diet

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Cash Isas: the staple Isa diet

Cash savings rates are so low it may seem unattractive to invest in cash Isas, but when might clients need them?

On 6 April 1999, the then Labour government introduced Isas to replace the earlier personal equity plans (PEPs) and tax-exempt special savings accounts (Tessas).

Initially, until 2008, Isas took two forms: a Maxi and a Mini Isa, with strict rules.

The Maxi was for those who wanted stocks and shares primarily, with a maximum annual limit of £7,000.

The Mini Isa was for those who primarily wanted to put their cash into an account which paid interest.

Individuals were allowed to hold a mini cash Isa, a mini stocks and shares Isa, and between 1999-00 and 2004-05, a mini insurance Isa.

Changes announced in 2007 and brought in during 2008 saw these distinctions disappear, with just one maximum annual allowance and a distinction between stocks and shares Isas and cash Isas.

Since then, the annual subscription limit for adult Isas has risen from £7,000 to £15,240 for the 2016 to 2017 tax year, as set out in the March 2016 Budget. This will move to £20,000 in the next tax year.

Simon Massey, director of wealth management for MetLife UK, said: “The government has made investing in Isas more attractive, with the tax-free subscription limit rising to £15,240 in the current tax year - more than double the level of 2008 to 2009.

“Changes to pension allowances are providing more impetus for the market, as the cuts to the lifetime allowance makes Isas a potential alternative for higher earners.”

But would you put all your clients’ annual allowance into a cash Isa?

Cash conundrums

With the bank base rate at 0.5 per cent, few investors can get a decent interest rate on cash Isas.

With cash Isas susceptible to interest rate moves, this makes them potentially unappealing in a period when interest rates are at near-historic lows Simon Bashorun

Data from MoneyFacts showed the top one-year fixed-rate Isas offer little in the way of return over a 12-month period, with Al Rayan Bank offering an expected (but not guaranteed) 1.9 per cent.

For three years, Nationwide and Halifax are offering a 2 per cent return - but how would the average return on the UK FTSE 100 stockmarket compare?

According to data from FTSE Group, as at 29 April 2016, investors have seen 8.4 per cent compound returns over the past three years from the blue chip index. Even net of fees, this is significantly higher than the rate of interest available on cash.

Top 1-year cash Isa savings rates as at 16 May 2016

NameReturnDurationMinimum investmentTransfer in?
Al Rayan Bank 1.9% expected rate12 Month Bond1000Yes
Britannia1.40%31.07.17£5,000Yes
Tesco Bank1.30%1 Year Bond£1Yes
Bank of Cyprus UK1.30%1 Year Bond£500No
Principality BS1.30%18 Month Bond£500Yes
Julian Hodge Bank 1.30%1 Year Bond£5,000Yes

Source: Moneyfacts

According to Patrick Connolly, certified financial planner for Chase de Vere, everyone should have some element of cash savings for accessibility. However, he added: “They shouldn’t necessarily hold this in a cash Isa, as it is unlikely to be the best wrapper to provide competitive long-term returns.

“The rates on cash savings products generally are poor, with little sign they will improve in the short to medium-term. Some Isas are offering lower rates than those on other savings products.”

Simon Bashorun, financial planning team leader at Investec Wealth and Investments agreed: “With cash Isas susceptible to interest rate moves, this makes them potentially unappealing in a period when interest rates are at near-historic lows.

“Also, it’s not specifically a disadvantage, but with personal savings allowances of £1,000 and £500 for basic and higher rate taxpayers respectively, at current interest rates, many investors are not paying tax on cash savings anyway.”

Daniel Harrison, senior partner for True Potential, pointed out: “Many cash Isas also offer higher introductory rates, which plunge after the first 12 months or force you to lock money away for a year with a high penalty for early withdrawals.”

But there are some benefits. One is the tax-free withdrawals at any time, without conditions other than might apply to underlying cash investments.

Mr Connolly acceded this point: “Those with larger amounts of cash savings should use cash Isas to ensure their interest is tax-free and will remain tax-free.”

Mr Bashorun added: “This Isa is available from the age of 16, enabling those aged between 16 and 18 to have a Junior Isa and a cash Isa.”

Indeed, as Louise Halliwell, senior savings product manager at Yorkshire Building Society (YBS) noted, cash Isas are still popular.

“The number of Isa accounts opened since April 2016 at the society has remained consistent with figures from last year, and even seen a slight increase (3 per cent) in uptake.

“The society has also noted an increase in the amount savers are depositing into their Cash Isa, with a 14 per cent increase in the total amount deposited year-on-year as customers continue to take advantage of the increased Isa allowances.”

Tom Williams, chartered financial planner for WHIreland, said cash Isas can be good, perhaps for people starting out on their savings journey.

“Cash Isas are simple to understand, accessible at any time - although interest can be forfeited if accessed before the end of a fixed term) and covered by a guarantee up to the Financial Services Compensation Scheme Limit.”

This limit is currently £75,000.